China approves $586 Billion stimulus to boost economy

[The Grim Squeaker]

BEIJING (Reuters) - China's cabinet has approved a massive stimulus package worth 4 trillion yuan ($586 billion) through 2010 to boost domestic demand, the official Xinhua news agency said on Sunday.

Investments will be targeted at infrastructure, social welfare and other key sectors as part of an "active" fiscal policy, Xinhua said.

It did not say how the extra spending would be financed.

China ran a consolidated budget surplus in the first half of the year of more than $170 billion, but tax revenue growth is slowing sharply as the economy reels under the impact of the global credit crunch.

The cabinet also announced an explicit shift in monetary policy, which it now described as "moderately easy."

The People's Bank of China has already cut interest rates three times since mid-September and scrapped lending quotas in a bid to support the economy.

Lending to small and medium enterprises will be increased as part of the plan, Xinhua said.

Officials have been flagging measures to pump up demand since gross domestic product growth slowed unexpectedly sharply to 9.0 percent in the third quarter from 10.4 percent in the first half.

Indicators for October have been even weaker.

Giving details of the package, Xinhua said China would invest an additional 100 billion yuan in national construction this quarter and would earmark an extra 20 billion yuan next year for reconstruction in areas hit by major natural disasters.

Sector that will benefit from the extra spending include affordable housing, rural infrastructure, transport networks, environmental protection and technical innovation, Xinhua said.

The cabinet also confirmed a long-awaited reform to the way value added tax is calculated. The result will be to reduce companies' tax bill by 120 billion yuan a year, the agency added.

(Editing by Alan Wheatley and David Holmes)

Cue rants about the 700 billion USA financial stimulus in 3.2.1...

[ray245]

I remember one economist saying, it can be nice if the US can follow China for a day, just to ensure the money can get through, while restruturing its economy.

Just for a day.

[J]

Silly communists, don't they know the bailout money is supposed to go in at the top so it can trickle down to the people?

At least China has a few trillion in foreign currency reserves to burn through for its programs so they're not too badly off, yet. On the other hand I recall reading somewhere that they require an annual GDP growth of around 8% to keep money & credit flowing through their economy so it doesn't collapse, that could be trouble.

[ray245]

Silly communists, don't they know the bailout money is supposed to go in at the top so it can trickle down to the people?

At least China has a few trillion in foreign currency reserves to burn through for its programs so they're not too badly off, yet. On the other hand I recall reading somewhere that they require an annual GDP growth of around 8% to keep money & credit flowing through their economy so it doesn't collapse, that could be trouble.

The scarier part is, the CCP depends on the strong economic position to legitimize their rule. The best and most peaceful way to see China becoming democratic is to see a CCP with a huge support from the public, and allow them to secure victory in an election.

[Guardsman Bass]

That's a huge stimulus when you consider the size of their economy - $586 billion stimulus (for an economy that in official exchange rates is $3.251 trillion) means that they are injecting a stimulus equal to 18% of their official economy. That'd be like the US using a $2.5 trillion stimulus.

[Phantasee]

That's a huge stimulus when you consider the size of their economy - $586 billion stimulus (for an economy that in official exchange rates is $3.251 trillion) means that they are injecting a stimulus equal to 18% of their official economy. That'd be like the US using a $2.5 trillion stimulus.

$2.5 trillion? That's not that hard to get to.

Let's see, throw in the $700 billion you've already got out there, and you only need a few more "packages" like that to get near there.

[TithonusSyndrome]

That's a huge stimulus when you consider the size of their economy - $586 billion stimulus (for an economy that in official exchange rates is $3.251 trillion) means that they are injecting a stimulus equal to 18% of their official economy. That'd be like the US using a $2.5 trillion stimulus.

$2.5 trillion? That's not that hard to get to.

Let's see, throw in the $700 billion you've already got out there, and you only need a few more "packages" like that to get near there.

Consider also the fact that the monthly bailouts in 20-50B increments leading up to the headline-grabbing $700B proposal were somewhere in the neighborhood of $900 billion, all told.

[mr friendly guy]

I thought China needed a growth of 8% so that it can create enough jobs for all these new job seekers every year, so that the CCP doesn't have to deal with civil unrest from unemployed people.

In any event, they need to fix up their aging infrastructure as seen from how the rail ways struggled to during the snow storms earlier in the year, plus to fix up damage from disaster ravaged areas. They may as well fork out the money now, when the US and Europe look to be in recession, so at least they continue to grow at the required 8%.

[Guardsman Bass]

That's a huge stimulus when you consider the size of their economy - $586 billion stimulus (for an economy that in official exchange rates is $3.251 trillion) means that they are injecting a stimulus equal to 18% of their official economy. That'd be like the US using a $2.5 trillion stimulus.

$2.5 trillion? That's not that hard to get to.

Let's see, throw in the $700 billion you've already got out there, and you only need a few more "packages" like that to get near there.

That's true, I suppose. But to release it in one blow . . . that would really be something. You could probably do health care, a lot of infrastructure, and some major strides towards a better energy grid with that kind of money, plus dinero for the military modernizations (I wonder how much it would cost to buy 2,000 F-22s).

[ray245]

Come to think of it, it is remarkable to see China having that much money to begin with. Twenty to thirty years ago, if a global recession hits China, that nation will be hard pressed to find enough money to poor into saving their economy.

[Count Chocula]

Well, it's one way to spend their US dollars before rampant inflation devalues their foreign currency reserves.

[Count Chocula]

Ghetto edit: Rampant US inflation.

[Guardsman Bass]

Come to think of it, it is remarkable to see China having that much money to begin with. Twenty to thirty years ago, if a global recession hits China, that nation will be hard pressed to find enough money to poor into saving their economy.

That's one nice side-effect of sitting on more than a trillion dollars in foreign currency reserves.

[ray245]

Which makes me wonder, can China gain more political stability after this economic crisis?

[mr friendly guy]

Well Asian markets responded positively with that announcement. And the Australian stockmarket also went up, particularly the miners since we sell lots of natural resources to China, what with China being now our number one trading partner.