KEY POINTS:
China's massive effort to shore up its domestic economy may also do the world a favour.
"Very few countries are going to match this stimulus - it's huge," said Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington. "It's a very strong step and puts them in a commanding position in setting an example to other economies."
The US$586 billion ($1 trillion) stimulus package, announced on Monday, pushed the price of copper and silver higher and sent stocks soaring from Hong Kong to Frankfurt.
The reaction was a sign of global dependence on the US$3.3 trillion Chinese economy, which accounted for about a quarter of world growth last year and consumed 41 per cent of coal production.
The global financial crisis and resulting collapse in demand has led to a contraction in Chinese manufacturing and a slump in exports. In addition to propping up domestic industries, the measures may give the world a cushion as the US, European and Japanese economies shrink.
The 10-point plan allocates money for affordable housing, rural infrastructure, railways, power grids, social welfare to raise incomes and rebuilding after the May 12 Sichuan earthquake.
China will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment.
"This broad-based fiscal stimulus programme will emerge as the Government's front line of defence against an excessive economic slowdown," said Jing Ulrich, chairwoman of China equities at JPMorgan Chase in Hong Kong.
The pledge came as leaders from the Group of 20 nations, which includes China, prepare to meet for crisis talks in Washington on November 14-15.
Finance ministers from the group, meeting last weekend in Sao Paulo, called for interest rate cuts and an increase in government spending to alleviate the crisis.
"China showed the G20 with this package that it is a big player in the world economy, capable of contributing to global economic stability," said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York.
China may cut interest rates again after three reductions in the past two months, central bank Governor Zhou Xiaochuan said after the package was unveiled. A new, looser monetary policy suggests "that money supply will increase, liquidity will be ample, or interest rates on bank loans will be lower", Zhou said at a meeting in Sao Paulo to prepare for the G20 summit.
The central bank said on its website it will strengthen "guidance" so that bank lending goes to key projects and smaller businesses.
China's largest banks, with 4 trillion yuan ($1 trillion) of cash, have resisted Government efforts to boost lending to 42 million small and medium-sized companies that drove the economic boom of the past decade.
"It is clear that aggressive fiscal stimulus is necessary to jumpstart the economy at a time of sharply deteriorating outlook and sentiment," said Wang Tao, an economist at UBS in Beijing.
The ripple effect of the plan showed immediately on world markets. China's CSI 300 Index of shares closed 7.4 per cent higher, the biggest increase in seven weeks. Copper gained as much as 8.4 per cent in London.
In Europe, mining companies BHP Billiton and Rio Tinto Group jumped more than 8 per cent. National stock indexes gained in 16 Western European nations and fell in two, Austria and Spain.
Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, which manages US$30 billion, said: "It is a big deal and therefore is a note of optimism especially for the global economy. And we're all hopeful that it will help US stocks as well, especially raw materials."
Booming demand in China spurred six straight years of gains for the UBS Bloomberg Constant Maturity Commodity Index, a gauge of 26 raw materials. The Asian country is the world's biggest metals buyer and the second largest consumer of oil. Spending to expand Chinese railroads, electricity grids and housing helped to more than quadruple the price of copper and nickel from 2001 to 2007.
But even an economy the size of China's may not have the wherewithal to withstand the worst economic crisis since the Great Depression, said Ben Simpfendorfer, an economist at Royal Bank of Scotland Group.
"There is still a risk that an increasingly market-driven economy corrects faster than the fiscal package can be implemented," Simpfendorfer said. "We need to see evidence in the coming months that the fiscal package is either spurring demand or bolstering sentiment."
Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, estimates that only about a quarter of the package, or US$150 billion, represents new spending. "One implication of our point - that the 4 trillion yuan announcement exaggerates the 'newness' and size - means that it should not be surprising if China announces additional fiscal stimulative measures next year."
China's exports have quadrupled in seven years and its trade surplus reached a record US$262 billion last year. China is the world's second largest exporter behind Germany, the WTO says.
The country has averaged 9.9 per cent growth for the past 30 years and its expansion underpins demand for the exports of its Asian neighbours and commodities from iron ore to soybeans.
THE PACKAGE
* China has announced it will invest US$586 billion ($1 trillion) into its domestic economy.
* The plan allocates money for affordable housing, rural infrastructure, railways, power grids, social welfare to raise incomes and rebuilding after the May 12 Sichuan earthquake.
* China will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment.
- BLOOMBERG
WEN'S GIFT
China's massive stimulus package is its "biggest contribution to the world," Premier Wen Jiabao said.
Wen, the country's top economic official, said the plan was meant to boost investment and consumer spending, maintain export growth and promote corporate competitiveness and financial reform, state television reported.
"We must implement the measures to ensure a fast and stable economic development," Wen said.
"They are not only the needs of the development of ourselves, but also our biggest contribution to the world."
- AP
