China okays $586 bln spending plan to bolster growth

By Alan Wheatley, China Economics Editor

BEIJING (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 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 mobilize 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 checks this summer, while Germany last week agreed to a 50 billion euro pump-priming plan.

Morgan Stanley 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 program, 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.