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CHINA STIMULUS PLAN FUELS HOPES FOR NEW INVESTMENT

Posted by Gilmour Poincaree on November 11, 2008

Posted on Mon, Nov. 10, 2008

by Joe McDonald

The Associated Press

BEIJING – China’s $586 billion stimulus package is its “biggest contribution to the world,” Premier Wen China's $586 billion stimulus package is its 'biggest contribution to the world'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.

The massive Chinese spending plan , the largest ever undertaken by the communist leadership , was motivated by growing alarm at an unexpectedly sharp downturn in the country’s fast-growing economy that raised the threat of job losses and social unrest.

Sunday’s announcement staked out a bold position as President Hu Jintao prepares for next weekend’s meeting in Washington of leaders of 20 major economies to discuss a response to the global financial crisis.

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.

“We must implement the measures to ensure a fast and stable economic development,” Wen told a meeting of government leaders, according to a report on state television. “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,” said Tim Condon, Asia regional economist for the Dutch bank ING.

On a global scale, “countries that supply capital equipment look like they will be the front-line beneficiaries of this package,” he said.

Asian stock markets surged Monday on news of the plan, but world markets were mixed later in the day. Wall Street erased an early rally as enthusiasm for the Chinese package gave way to anxiety about how U.S. companies will survive a severe pullback in spending.

China’s economic growth slowed to 9 percent in the last quarter, down from last year’s stunning 11.9 percent 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.

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 has allocated $168 billion this year for tax rebates to individuals and tax breaks for businesses, in addition to the $700 billion to bail out troubled financial institutions.

Unlike China’s plan, it includes no spending on capital projects, though President-elect Barack Obama has supported an additional $50 billion stimulus package for infrastructure projects such as roads and bridges, intended to create jobs. House Speaker Nancy Pelosi urged Congress last week to approve a stimulus bill before the end of the year.

Meeting in Brazil, G20 finance ministers and central bank governors 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.

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

“The exaggeration highlights the government’s desperation to revive sentiment, which is perhaps the key factor to sustaining growth amid global turmoil,” Chan said.

Beijing’s stimulus package represents another drastic step away from lending curbs and other anti-inflation measures 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 a year earlier, 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 $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.

****

Associated Press researcher Bonnie Cao in Beijing contributed to this report.

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PUBLISHED BY ‘PHILLY.COM’ (USA)

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One Response to “CHINA STIMULUS PLAN FUELS HOPES FOR NEW INVESTMENT”

  1. stockresearch52 said

    The economic stimulus package of $ 586 billion
    announced by the Chinese government
    would definitely boost the ailing sentiment of
    global economic crisis.Although the time span
    has been spread in to couple of years is should
    leave a good multiplier effect on the
    economic system.In that process I suggest china to
    introduce a global currency and banking system.

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