As inflation crested and economic growth started to slow, The People's Bank of China had already relaxed its monetary stance to 'prudent and flexible'. -- PHOTO: AFP
BEIJING - CHINA has approved a 4 trillion yuan (S$877 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.
Package is 'good news': IMF chief
SAO PAULO - CHINA'S massive government spending package to boost domestic demand is 'good news' that will help the global economy ride out the financial crisis, the International Monetary Fund's managing director said on Sunday.
'The IMF is arguing for rather a long time that China should shift its policy from export-led growth to a more domestic-driven growth,' Mr Dominique Strauss-Kahn told Reuters after a meeting of G20 finance officials in Brazil's business capital Sao Paulo.
China's stimulus package to be felt around the world
BEIJING - CHINA'S announcement of a stimulus package that will pour more than half a trillion dollars into its economy will have repercussions far beyond its borders in a time of global crisis, economists say.
The package, decided at a recent meeting chaired by Premier Wen Jiabao, calls for tax cuts and increased spending corresponding to about seven per cent of China's gross domestic product over the next two years.
SYDNEY - CHINA'S massive financial stimulus package was good news for Australia and the region, Prime Minister Kevin Rudd said on Monday.
Mr Rudd told parliament it represented 'an extraordinary fiscal stimulus package, which I believe is not just of significance to this economy, but also to the economy of wider east Asia and the world.'
The People's Bank 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 per cent 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 per cent of annual economic output spread over little more than two years.
'This is pretty major,' said Mr 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 US$100 billion (S$148.7 billion) in tax rebate cheques this summer, while Germany last week agreed to a 50 billion euro (S$95.2 billion) pump-priming plan.
Morgan Stanley economist Qing Wang called the package 'aggressive', while Mr Jing Ulrich, head of China equities at JPMorgan, 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 per cent 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,' Mr 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 US$170 billion.
Year-on-year tax revenue growth has since dwindled to just 3 per cent due to poorer corporate profits, but domestic Treasury debt is just 16 per cent of gross domestic product, Mr Kroeber 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.
Mr 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.
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. -- REUTERS
