China unveils $586bn economic stimulus

November 10, 2008

The Chinese government announced a $586bn (£374bn) economic stimulus package yesterday designed to boost the country's weakening economy and help to counter the looming global recession.

Beijing is to loosen credit conditions, cut taxes and undertake a giant infrastructure spending programme over the next two years that will amount to up to 7 per cent of the country's gross domestic product. The scheme is not as big as the $700bn government bail-out in the US, but China's economy is only one quarter the size of North America's.

Investments will go ahead in 10 areas including housing, rural infrastructure and rebuilding after disasters such as the devastating earthquake in May. In the next three months alone, some 400bn yuan (£9.3bn) will be made, including 100bn yuan from current funds and another 20bn Yuan brought forward from next year's post-disaster reconstruction budget, the Chinese government said.

The decision was announced yesterday by the State Council following last Wednesday's meeting led by Premier Wen Jiabao. "Over the past two months, the global financial crisis has been intensifying daily," the State Council statement said. "In expanding investment, we must be fast and heavy-handed." The package, likely to welcomed across the world, comes just as President Hu Jintao is about to travel to Washington to participate in the global economic summit next weekend.

China's central bank has already cut interest rates three times in the last two months in an attempt to warm up an economy cooled by falling exports, lower manufacturing output and dropping property prices. The government is banking on expanded domestic demand, fast-track construction projects and improved living standards for the poor to fill the gap left by exports. Since last year, monetary policy in China has been tight – leaning on banks to control lending, for example – as part of measures designed to take the edge off building inflation caused by an economy close to overheating.

The State Council says the country is now to adopt "active" fiscal and "moderately active" monetary policies with a view to "steady and relatively fast" economic growth. The government is abolishing commercial banks' credit ceilings, to channel lending to priority projects, and scrapping loan quotas, to help small businesses. Fiscal measures also in the scheme include value-added tax reforms on purchase of fixed assets such as machinery that Beijing says will cut industry costs by 120bn yuan, and raised grain purchase prices, farmers' subsidies and allowances for low-income urban households.

After five years of spectacular success – hitting a massive 11.7 per cent growth in 2007 and accounting for 27 per cent of all global expansion – the Chinese economy has shown signs of braking recently. GDP expansion dropped back to single digits for the first time this year, and the harshest predictions for the fourth quarter fall as low as 5.8 per cent. Even the relatively cautious International Monetary Fund has cut its forecast for the full year to 9.7 per cent, with predictions for 2009 even lower at 9.3 per cent.