China stimulus plan fuels new investment hopes

The dramatic Chinese plan was motivated by growing government alarm at an unexpectedly sharp downturn in the country's fast-growing economy.

China worker 88 248 (photo credit: )
China worker 88 248
(photo credit: )
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. 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%. In China, the Shanghai Composite index jumped 7.3%. 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% in the last quarter, down from last year's stunning 11.9% 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%. 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%, which eroded demand for imported ore. 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 US allocated $168b. this year for tax rebates to individuals and tax breaks for businesses in addition to the $700b. committed to bailout troubled financial institutions. Germany has set aside $29b. for tax breaks on new cars and credit assistance for companies. Japan allotted $275b. for loans to small- and mid-sized businesses and discounts on highway tolls among other measures.