China pours $1 trillion into economy

4:00AM Tuesday Nov 11, 2008
Sarah Arnott
INDEPENDENT Journalist

The Chinese Government has announced a US$586 billion ($NZ980 billion) economic stimulus package designed to boost the country's weakening economy and help to counter the looming global recession.

Beijing is to loosen credit conditions, cut taxes and undertake a giant infrastructure spending programme over the next two years that will amount to up to 7 percent of the country's gross domestic product (GDP). The scheme is not as big as the US$700 billion government bailout in the US, but China's economy is only one quarter the size of North America's. Investments will go ahead in 10 areas including housing, rural infrastructure and re-building after disasters such as the devastating earthquake in May 2008.

Share prices on China's Shanghai Composite Index and Japan's Nikkei surged by more than 5 percent yesterday. Australasian markets also got a boost. New Zealand's NZX-50 rose 1.65 percent while Australia's ASX-200 climbed 1.39 percent. The New Zealand dollar rose to US59.67c from Friday's close of US58.68c and the Australian dollar rose 0.22 percent to US68.68c on signs the package could boost demand for commodities.

China's spending package "has given high-yielding, growth-sensitive currencies like the kiwi and the Aussie a boost," said Danica Hampton, a currencies strategist at BNZ. Oil leaped more than US$3 to over US$64 a barrel. In the next three months alone, some 400 billion yuan ($NZ98 billion) will be made available, including 100 billion yuan from current funds and another 20 billion yuan brought forward from next year's post-disaster re-construction budget, the Chinese Government said.

The package comes just as Chinese President Hu Jintao is about to travel to Washington, USA to participate in the global economic summit this weekend. China's central bank has already cut interest rates three times in the last two months in an attempt to warm up an economy cooled by falling exports, lower manufacturing output and dropping property prices. The Government is banking on expanded domestic demand, fast-tracked construction projects and improved living standards for the poor to fill the gap left by exports.

Since last year, monetary policy in China has been tight - leaning on banks to control lending, for example - as part of measures designed to take the edge off building inflation caused by an economy close to overheating. The State Council says the country is now to adopt "active" fiscal and "moderately active" monetary policies. The Government is abolishing commercial banks' credit ceilings, to channel lending to priority projects, and scrapping loan quotas, to help small businesses.

Fiscal measures also in the scheme include value-added tax reforms on the purchase of fixed assets such as machinery that Beijing says will cut industry costs by 120 billion yuan, and raised grain purchase prices, farmers' subsidies and allowances for low-income urban households. After five years of spectacular success - hitting a massive 11.7 percent growth in 2007 and accounting for 27 percent of all global expansion - the Chinese economy has shown signs of braking. GDP growth dropped to single digits for the first time this year, and the harshest predictions for the fourth quarter fall as low as 5.8 percent. The International Monetary Fund (IMF) has cut its forecast for the full-year to 9.7 percent, with predictions for 2009 at 9.3 percent.

PRIMING THE PUMP:
* China's $980 billion package aims to slow slide in growth now in single figures.
* New funding for housing, infrastructure and disaster rebuilding.

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