China's $586bn boost for own economy may have done the whole world a favour
Thursday November 13 2008
China's massive effort to shore up its domestic economy may also do the world a favour.
"Very few countries are going to match this stimulus -- it's huge,'' said Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington. "It's a very strong step and puts them in a commanding position in setting an example to other economies."
The $586bn stimulus package, announced on November 9, pushed the price of copper and silver higher earlier in the week and sent stocks soaring from Hong Kong to Frankfurt. The reaction was a sign of global dependence on the $3.3 trillion Chinese economy, which accounted for about a quarter of world growth last year and consumed 41pc of coal production.
The global financial crisis and resulting collapse in demand has led to a contraction in Chinese manufacturing and a slump in exports. In addition to propping up domestic industries, the measures may give the world a cushion as the US, European and Japanese economies shrink.
The 10-point plan allocates money for affordable housing, rural infrastructure, railways, power grids, social welfare to raise incomes and rebuilding after the May 12 Sichuan earthquake. China will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment. The plan didn't detail how much would be spent on each area nor how much of the spending had already been announced.
"This broad-based fiscal stimulus programme will emerge as the government's front line of defence against an excessive economic slowdown," said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co in Hong Kong.
G20 Meeting
The pledge came as leaders from the Group of 20 nations, which includes China, prepare to meet for crisis talks in Washington on November 14 and 15. Finance ministers from the group, meeting last weekend in Sao Paulo, called for interest rate cuts and an increase in government spending to alleviate the economic and financial crisis.
"China showed the G-20 with this package that it is a big player in the world economy, capable of contributing to global economic stability,'' said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York.
China may cut interest rates again after three reductions in the past two months, central bank Governor Zhou Xiaochuan said after the package was unveiled.
He's got extra room to move. Inflation cooled to 4pc in October, the weakest pace in 17 months, the government said.
A new, looser monetary policy suggests "that money supply will increase, liquidity will be ample, or interest rates on bank loans will be lower", Zhou told reporters at a meeting in Sao Paulo to prepare for the G20 summit.
Guidance
The central bank said it wouldstrengthen "guidance" so that bank lending goes to key projects and smaller businesses.
China's largest banks, with 4 trillion yuan ($486bn) of cash, have resisted government efforts to boost lending to 42 million small and medium-size companies that drove the economic boom of the past decade.
"It is clear that aggressive fiscal stimulus is necessary to jumpstart the economy at a time of sharply deteriorating outlook and sentiment," said Wang Tao, an economist at UBS AG in Beijing. She called higher bank lending "critical to sustain corporate investment needs".
The ripple effect of the plan showed immediately on world markets.
However, even an economy the size of China's may not have the wherewithal to withstand the worst economic crisis since the Great Depression, said Ben Simpfendorfer, an economist at Royal Bank of Scotland Group.
"There is still a risk that an increasingly market-driven economy corrects faster than the fiscal package can be implemented," Simpfendorfer said.
"We need to see evidence in the coming months that the fiscal package is either spurring demand or bolstering sentiment." (Bloomberg)
