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China announces $586 billion stimulus plan

China has announced a $586 billion spending package to boost domestic demand while vowing to carry out "moderately easy monetary policies."
/ Source: The Associated Press

China's massive stimulus package is its "biggest contribution to the world," Premier Wen Jiabao said Monday, as hopes rose that heavy spending on construction and other projects would help support global growth by fueling demand for imported machinery and raw materials.

With Sunday's announcement of the 4 trillion yuan ($586 billion) package, China staked out a bold position as President Hu Jintao prepared for next weekend's Washington meeting of leaders of 20 major economies to discuss a response to the global financial crisis.

"China has really set the pace for expansionary policies elsewhere," said Tim Condon, Asia regional economist for the Dutch bank ING.

Wen, the country's top economic official, said the plan is meant to boost investment and consumer spending, maintain export growth and promote corporate competitiveness and financial reform, state television reported on its national evening news. It said he made the comments at a meeting of government leaders.

"We must implement the measures to ensure a fast and stable economic development," Wen said in comment read by an announcer. "They are not only the needs of the development of ourselves, but also our biggest contribution to the world."

The plan calls for higher spending through 2010 on airports, highways and other infrastructure, more aid to the poor and farmers and tax cuts for exporters. That could boost demand for iron ore from Australia and Brazil, factory and construction equipment from the United States and Europe and industrial components from throughout Asia.

"Faster growth in China will be better for its neighbors. For every country in the region, it's either their top trading partner or is on the way to becoming the top," Condon said. On a global scale, "countries that supply capital equipment look like they will be the front line beneficiaries of this package."

Asian stock markets surged Monday on news of the plan. Japan's Nikkei index rose 5.8 percent and Hong Kong's Hang Seng index gained 3.5 percent. In China, the Shanghai Composite index jumped 7.3 percent to 1,874.80.

The dramatic Chinese plan was motivated by growing government alarm at an unexpectedly sharp downturn in the country's fast-growing economy that raised the threat of job losses and social unrest.

China's economic growth slowed to 9 percent in the last quarter, down from last year's stunning 11.9 percent growth and its lowest level in five years. Export orders have fallen sharply as global demand weakens, leading to layoffs and factory closures.

Analysts have slashed forecasts of next year's economic growth but said Monday that with the new stimulus it should be at least 8 percent.

The slowdown has rippled through Chinese industries and outward to foreign suppliers.

China is the world's biggest steel producer but mills responded to weaker demand this year by cutting output 20 percent, which eroded demand for imported ore.

The spending package is "definitely positive news for all steel companies. It will boost demand for steel and iron," said a spokesman for steelmaker Beijing Shougang Group, who would give only his surname, Wu.

China's announcement came as economic officials from the Group of 20 leading economies, which includes major wealthy and developing nations, called Sunday for increased government spending to boost the troubled global economy.

The United States allocated $168 billion this year for tax rebates to individuals and tax breaks for businesses in addition to the $700 billion committed to bailout troubled financial institutions. Germany has set aside $29 billion for tax breaks on new cars and credit assistance for companies. Japan allotted $275 billion for loans to small- and mid-sized businesses and discounts on highway tolls among other measures.

At the weekend meeting in Brazil, G20 finance ministers and central bank governors also said emerging economies deserve a prominent role in talks to overhaul the world financial system.

Hu plans to press that demand in Washington at the leaders' meeting on Saturday, a Chinese government spokesman said last week.

Beijing's stimulus package represents another drastic step away from lending curbs and other anti-inflation measures that it imposed over the past three years but has been rolling back since mid-2008 as growth slowed.

Wholesale inflation eased in October, which gives authorities more leeway to stimulate the economy without igniting new price rises, according to data reported Monday. The government said producer prices rose 6.6 percent in October from the year-earlier period, down from August's 12-year high of 10.1 percent.

China switched its official goal in mid-2008 from a single focus on fighting inflation to a dual target of ensuring fast economic growth while also containing price rises. It has cut interest rates three times in recent weeks and lifted limits on how much each Chinese bank can lend.

The new stimulus plan depends heavily on getting the country's companies to invest, economists said.

Beijing might supply as little as one-quarter of the announced spending, or 1 trillion yuan ($145 billion), with the rest coming from state companies, bank lending or bond sales by local authorities, said Ting Lu, a Merrill Lynch economist.

That might require regulators to ease lending and investment curbs, said UBS Securities economist Tao Wang.

"With this strong signal that comes from this package that the government will put its own money on the line, that could bring about matching bank lending and promote corporate investment," Wang said.

Still, Beijing's announcement appears to exaggerate the size of its plan by including projects already under way, including reconstruction from the devastating May earthquake in China's southwest, said Sheridan Chan, an economist for Moody's

"The exaggeration highlights the government's desperation to revive sentiment, which is perhaps the key factor to sustaining growth amid global turmoil," Chan said in a report.