OECD sees big boost from China fiscal stimulus

BEIJING (Reuters) - China's 4 trillion yuan ($586 billion) spending package is likely to deliver a strong boost to the world's fourth-largest economy in 2009-2010, the Organisation for Economic Cooperation and Development said on Tuesday.

In its biannual Economic Outlook, the Paris-based OECD said the November 9 measures represent "a major upside factor" for development over the next two years, even though it is unclear exactly how much stimulus will flow from them.

The package includes investment in affordable housing, transport infrastructure and environmental protection, but the government has not said how much of the headline figure is new, rather than already budgeted, spending.

Under VAT reforms announced in conjunction with the package, companies will be allowed to deduct the cost of capital goods from their taxable base from January 1.

"Capital formation is likely to be boosted both in the government sector, through accelerated outlays on infrastructure, and in the company sector, through the change in the value-added tax regime," the OECD said.

"This latter reform will significantly lower the user cost of capital for firms, so stimulating their investment."

One risk to growth is that exports prove more sensitive than assumed to drooping foreign demand or that exporters do not cut prices; another is that consumer spending weakens more than expected due to eroding asset prices, the OECD said.

The stimulus package came too late to be incorporated in the OECD's projections, which envisage a slowdown in gross domestic product growth to 8.0 percent in 2009 from 9.5 percent this year and a drop in consumer inflation to 3.0 percent from 6.1 percent.

With headline inflation declining, China has further scope to use monetary policy to offset the impact of the global downturn, the OECD said. The People's Bank of China has already cut after interest rates three times since mid-September,

"Lower inflation also provides an opportunity to re-align energy prices with underlying costs; major hikes in electricity prices are required to alleviate shortages and stimulate much-needed investment spending in the sector," the Outlook said.

(Reporting by Alan Wheatley; Editing by Jan Dahinten)