HONG KONG, Nov 26 - Investors are already rewarding China for its massive government spending spree and could spread their money to its neighbours, hoping that emerging Asia's most important economy can jumpstart the entire region.

Like many governments globally, China is frantically trying to spend its way out of trouble, throwing money at roads, rails and other projects to soften the blow of a worldwide downturn.

However, unlike the United States, Europe and developing nations, China and some other economies in Asia have the deep savings and solid financial base to spend more without completely blowing their budgets, fund managers and economists said.

"Markets see that Asia is starting to act aggressively in terms of fiscal stimulus and the key is that they can do more," said Anthony Chan, Asia sovereign strategist with AllianceBernstein in Hong Kong.

"The market will not penalise countries like Hong Kong, China, Korea, or Taiwan if they run a fiscal deficit that is around 2 percent of GDP, if these are the right policies to mitigate downside risk."

The policies are also proving attractive to investors, who had dumped emerging market assets heavily in October as a global crisis that started last year took a sharp turn for the worse following the collapse of Lehman Brothers.

Last week China equity funds attracted a net $392 million in capital, helping Asia ex-Japan post its first week of inflows since early September, according to research firm EPFR Global and as other emerging market equity funds continued to bleed capital.

To be clear, while tax cuts and housing and energy subsidies can quickly spur consumption, other spending, such as on infrastructure projects, can take months to be reflected in economic data. That means growth is unlikely to pick up until late in 2009 at the soonest.

Still, Asia's policymakers have not had to fork out billions to save their banks, unlike in many Western countries, leaving more cash available to try to stimulate growth.

CHINA'S SPENDING SPREE

So far Beijing's $586 billion economic spending package dwarfs plans put forth by other countries like South Korea and Singapore and makes up most of the stimulus pledged in Asia Pacific.

Still, about half of Asia is in a position fiscally to do more, including China, Hong Kong, Singapore, South Korea, Taiwan and Thailand, said AllianceBernstein's Chan.

JPMorgan economists expect the average government balance in the Asia-Pacific region to reflect a deficit of around 2.5 percent of gross domestic product in 2009. The U.S. budget shortfall already tops 3 percent and is increasing.

China's plan amounts to 15 percent of total economic output, although that comes down to some 3 percent if just new spending is counted, Merrill Lynch analysts say.

Still, such a fiscal boost would enable China to power 60 percent of world growth next year, they said in a note.

The lion's share of the spending is targeted at big industrial projects, including an 820 km (500 mile) railroad line from Chongqing to the dusty, poor town of Lanzhou in the West.

Some fund managers are watching projects like these closely.

Marco Polo Pure Asset Management, which has a China fund, increased its holdings of construction firms after China announced its stimulus measures and said it hoped to raise its overall net long position to 70 percent from about 56 percent by December.

Among the fund's top holdings are Qinghai Salt Lake Potash, Suning Appliance and China Railway Construction Corp.

Adrian Mowat, chief Asia and emerging market strategist with JPMorgan in Hong Kong, has recommended clients buy stocks in emerging Asia's financial and consumer discretionary sectors, especially after a series of Chinese rate cuts and the fiscal package.

He said to keep an eye out for Asian governments, including China, to offer relief through tax cuts.

"If you get mounting evidence the Chinese economy is stabilising, then I think that would be a powerful signal to Asian and emerging markets in general," he told a news briefing.

Aggressive government action is also reason to be more optimistic about bonds in 2009, said Anthony Michael, head of Asia fixed income at Aberdeen Asset Management in Singapore.

"There are people out there being forced to sell investment grade credit for 50 or 60 cents on the dollar and high-yield names for 30 or 40 cents," he said. Buy at those rock-bottom prices and "you're going to make equity-like returns for fixed income in the next two years."

ASIA'S STRAGGLERS

Of course, not all Asian countries have the budget flexibility or political expediency to deliver blockbuster stimulus packages.

Analysts often cite India, Indonesia and the Philippines as lacking the means to save ailing industries. They were running fiscal deficits even before the crisis hit growth expectations.

Just a few months ago, many Asian policy makers were slashing subsidy spending and raising interest rates to fend off inflation, but now growth matters most.

The decision by China's policymakers to try to draw a line in the sand as to how much its economy slows could provide significant support for emerging Asia.

Hans Genberg, executive director of the Hong Kong Monetary Authority's research department, believes China's stimulus plan can help limit Asia's downturn in two ways: through higher raw materials demand that would benefit exporters such as Australia and New Zealand, and through companies that supply goods for China's domestic economy.

"Economies that are able to make structural changes towards increased demand in China will benefit," he said at the Asia Risk conference in Hong Kong.