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China to stimulate economy with $586 billion

Facing global economic slowdown, China outlined a bold stimulus plan on Sunday (source: WSJ):

China's government announced a two-year stimulus exceeding a half-trillion dollars to offset the impact of slowing global growth and unlock the spending power of its vast population.

Premier Wen Jiabao's cabinet set plans for 4 trillion yuan, or $586 billion, in spending and stimulus measures through the end of 2010 aimed specifically to target people's livelihood, the official Xinhua News Agency said Sunday night.

It was unclear how much the plan, which will target 10 areas from rural infrastructure to low-cost housing, represents new spending and how quickly it can stimulate domestic demand.

The government also will adopt an "active" fiscal policy — meaning it will spend money and cut taxes — while the central bank will set a "moderately easy" tone that appears to signal further interest rate cuts and efforts to make banks boost lending, Xinhua said.

China's economy grew at the slowest rate in five years in the third quarter, slipping to 9% from the year before.

China has joined international calls to address faltering global business and consumer confidence, announcing plans that President Hu Jintao will visit Washington this week to meet other world leaders, including U.S. President-elect Barack Obama.

Economists say that while China remains a hopeful source of global growth, its momentum is pulling back more quickly than anticipated. Property prices are under downward pressure, factories are closing as export orders dry up and foreign direct investment is being called into doubt.

As demand in its major export markets falls, many agree on the need to stimulate spending by China's consumers, unlocking their $4 trillion in savings. A particular concern are the hundreds of millions of people in China's countryside, where the government appears particularly determined to boost spending power and has, for instance, already lifted grain purchase prices.

In Sunday's statement, the government said that among its earmarks will be money for transportation networks, ecology, technical innovation and post-disaster reconstruction. Few specific details on the spending plans were immediately announced.

Other measures include a restructuring of value-added taxes that Xinhua said will reduce business taxes by 120 billion yuan annually. The government will also look for banks to boost lending, removing a government-set lending ceiling and encouraging them to offer credit to smaller businesses, rural borrowers, technical innovators and buyout-oriented firms.

Bold action from Beijing isn't unexpected. The government has in recent months reversed course by slashing interest rates, pouring money into ailing stocks, giving developers leeway to build.

What had been missing in Beijing's aggressive policy mix so far, according to a report last week by JP Morgan, was a "big announcement."

Many economists have been looking for Beijing to unveil a big stimulus package similar to the one it relied on during the Asian Financial Crisis more than a decade ago. Then, Beijing issued massive amounts of domestic bonds to pay to extend highways, repair airports and build ports, a program that was deemed a strong success.

Just a year ago, China had adopted an unprecedented "tight" monetary policy, a step up in its three-year effort to keep the fast-growing economy from barreling out of control because it was expanding too quickly.

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