China Unveils 4 Trillion Yuan Spending as World Faces Recession

Nov. 10 (Bloomberg) -- China pledged a 4 trillion yuan ($586 billion) stimulus plan to prop up growth in the fourth-largest economy as the world heads toward a recession.

The funds, equivalent to almost a fifth of China's gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said yesterday on its Web site. Following a weekend meeting in Sao Paulo, finance ministers from the Group of 20 nations, of which China is a member, issued a joint statement saying they are ready to act ``urgently'' to tackle the economic slump.

``If the Chinese use this as a diplomatic initiative, it could be an important step toward a more coordinated response,'' Simon Johnson, a senior fellow at the Peterson Institute for International Economics and former chief economist of the International Monetary Fund, said in Boston.

China is taking steps to bolster its economy, the biggest contributor to global expansion, less than a week before President Hu Jintao goes to Washington for talks with world leaders on ways to revive growth. U.S. President-elect Barack Obama vowed last week to push a package through Congress ``immediately after'' taking office in January if lawmakers and the Bush administration can't agree on one before then.

China accounted for 27 percent of global economic growth last year, more than any other nation, according to IMF estimates. Central bank Governor Zhou Xiaochuan said Nov. 8 that boosting spending at home is the best way China can help avert a prolonged world recession.

`Intensifying' Crisis

Taiwan, which counts China as its largest trading partner, late yesterday cut interest rates for the fourth time in two months after exports dropped in October by the most in three years. The Federal Reserve, the European Central Bank and the Bank of Japan have all lowered their benchmark rates in the last two weeks, as has the People's Bank of China.

``Over the past two months, the global financial crisis has been intensifying daily,'' the State Council said in yesterday's statement. ``In expanding investment, we must be fast and heavy- handed,'' it said, adding that the central bank will pursue a ``moderately loose'' monetary policy.

The stimulus package, 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, it said.

The government will 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.

Grain Subsidies

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.

``We view this as a positive step,'' the U.S. Treasury's Undersecretary for International Affairs David McCormick told Bloomberg in televised interview in Sao Paulo ``This stimulus should help encourage domestic consumption'' in China, he said.

The stimulus plan should give a lift to China's shares, said Ben Simpfendorfer, an economist at Royal Bank of Scotland Group Plc in Hong Kong. The CSI 300 Index has tumbled 69 percent this year, the biggest drop among stock benchmarks in the Asia-Pacific region.

``The package will be positive for the stock market, but again, we need to see results,'' Simpfendorfer said.

``China is well positioned during the recession to boost infrastructure, modernize aging industrial assets and also invest in raw materials production abroad, including energy,'' said Ariel Cohen, a senior fellow at the Heritage Foundation in Washington.

May Boost Growth

The extra spending may boost the nation'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 yesterday's announcement, forecast GDP would rise no more than 7.5 percent next year, which would be the smallest increase in nearly two decades.

China is trying to stop an economic slowdown from deepening as exports wane, manufacturing cools 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.

Reported By Li Yanping and Chia-Peck Wong Bloomberg Hong Kong