China okays $586 bln spending plan to bolster growth

BEIJING, Nov 9 (Reuters) - China has approved a 4 trillion yuan ($586 billion) government spending package to boost domestic demand and help the world's fourth-largest economy ride out the global credit crisis, Xinhua news agency said on Sunday.

The State Council, or cabinet, also announced a shift to a "moderately easy" monetary policy, possibly foreshadowing further reductions in borrowing costs on top of three interest rate cuts made since mid-September.

The People's Bank (nasdaq: PBCT - news - people ) of China had already relaxed its monetary stance to "prudent and flexible" from "tight" in the summer as inflation crested and economic growth started to slow.

"With the deepening of the global financial crisis over the past two months, the government must take flexible and prudent macro-economic policies to deal with the complex and changing situation," according to a statement relayed by Xinhua.

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.

Economic conditions took a further turn for the worse in October. Still, analysts were impressed by the size of the stimulus package, which amounts to nearly 15 percent of annual economic output spread over little more than two years.

"This is pretty major," said Arthur Kroeber, head of Dragonomics, a Beijing economic consultancy. "It reflects the official view of how serious this problem is and shows that this is a government that can mobilise enormous resources to stimulate the economy when they put their minds to it."

By comparison, the United States sent out about $100 billion in tax rebate cheques this summer, while Germany last week agreed to a 50 billion euro pump-priming plan.

Morgan Stanley (nyse: MS - news - people ) economist Qing Wang called the package "aggressive", while Jing Ulrich, head of China equities at J.P. Morgan, said Beijing had resorted to the "massive" stimulus in the face of the sternest economic test since the Asian financial crisis.

China responded to that crisis in 1998 by issuing infrastructure bonds worth just 1.2 percent of GDP.

"Beijing's new policy drive of upgrading infrastructure, rural land reforms and expansion of social welfare is akin to a 'New Deal' with Chinese characteristics," Ulrich said in a note.

AFFORDABLE MEASURES

Xinhua did not say how the 10-point plan would be financed, but China can afford to spend freely. It ran a budget surplus in the first half of the year of more than $170 billion.

Year-on-year tax revenue growth has since dwindled to just 3 percent due to poorer corporate profits, but domestic Treasury debt is just 16 percent of gross domestic product, Kroeber said.

The announcement of the spending programme, decided by the cabinet on Wednesday, coincided with meetings in Sao Paulo of finance ministers and central bank chiefs to learn lessons from the financial turmoil and discuss how to support growth. [ID:nN09429118]

"As long as we adopt the correct policies and measures in a timely and decisive manner to seize opportunities and cope with challenges, we will definitely be able to maintain stable and fairly fast economic growth," the cabinet said.

As part of an "active" fiscal policy, Xinhua said investments would be targeted at roads, railways and airports across China.

Money would also be poured into affordable housing, rural infrastructure, the power grid, environmental protection, social welfare and technical innovation, Xinhua said.

Kroeber said a lot would depend on what proportion of the package is funnelled towards boosting spending to help wean the economy off rapid investment, which has been the main driver of China's double-digit growth over the past five years.

"How much of it will be good old tried-and-true building bridges, and how much will be put into income and consumption support measures that are arguably more beneficial?" he asked.

Underlining the need to boost capital spending "swiftly and forcefully", Xinhua said China would invest an additional 100 billion yuan in national infrastructure this quarter.

With another 20 billion yuan brought forward from next year's budget for post-disaster reconstruction, nationwide investment this quarter would reach 400 billion yuan, Xinhua said.

The cabinet also confirmed a long-awaited change in the way value added tax (VAT) is calculated. Companies will be able to deduct the cost of capital equipment when working out their VAT bills, saving them about 120 billion yuan a year, Xinhua said. ($=6.83 yuan) (Additional reporting by Kirby (nyse: KEX - news - people ) Chien in Beijing and Eadie Chen in Sao Paulo; Editing by David Holmes)

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