China Announces 4 Trillion Yuan Economic Stimulus

Bloomberg | November 9, 2008
By Li Yanping and Chia-Peck Wong

Nov. 9 (Bloomberg) -- China announced a 4 trillion yuan ($586 billion) stimulus plan to spur expansion in the world's fourth-largest economy, helping sustain global growth as the U.S., Europe and Japan teeter on the brink of recession.

The funds, equivalent to almost a fifth of China's $3.3 trillion gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said today on its Web site. China will adopt a ``pro-active fiscal policy'' and pursue a ``moderately loose'' monetary policy, it said.

``We have long-awaited this stimulus plan,'' said Ken Peng, an economist at Citigroup Inc. in Shanghai. ``The measures may stimulate domestic demand, but they won't prevent China's economy from slowing further as the global economy is certainly in a recession.''

China is taking steps to bolster its economy, the biggest contributor to global expansion, less than a week before Premier Wen Jiabao goes to Washington for talks with world leaders on ways to address the economic slump. People's Bank of China Governor Zhou Xiaochuan said yesterday boosting spending at home is the best way China can help.

China accounted for 27 percent of global economic growth last year, more than any other nation, the International Monetary Fund said in a report in April this year. Taiwan, which counts China as its largest trading partner, today cut interest rates for the fourth time in two months after exports dropped in October by the most in three years.

``Over the past two months, the global financial crisis has been intensifying daily,'' the State Council said in today's statement. ``In expanding investment, we must be fast and heavy- handed.''

Housing, Infrastructure

The package announced today, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, the State Council said.

The government will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies' costs by an estimated 120 billion yuan.

In addition, grain purchase prices and subsidies for farmers will be raised, as will allowances for low-income urban households. The government also scrapped loan quotas to help boost lending to small businesses.

The stimulus plan may boost China's economic growth by 2 percentage points next year, said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. UBS AG and Credit Suisse AG before today's announcement forecast expansion of no more than 7.5 percent for next year, which would be the slowest in nearly two decades.

Manufacturing, Property Slump

Wen is trying to stop China's economic slowdown from deepening as exports wane, manufacturing contracts and a property slump undermines domestic demand. The central bank has already cut interest rates three times in two months, reducing the one-year lending rate to 6.66 percent.

Manufacturing contracted by the most since at least 2004 in October and export orders dropped to their lowest, according to CLSA Asia Pacific Markets. Home sales have plunged in major cities including Beijing and the stockpile of unsold new vehicles was at a four-year high in September.

``The golden years have shuddered to a dramatic halt,'' said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.