China Announces 4 Trillion Yuan Economic Stimulus

China Announces 4 Trillion Yuan Economic Stimulus (Update1) By Li Yanping and Chia-Peck Wong Nov. 9 (Bloomberg) -- China announced a 4 trillion yuan ($586 billion) stimulus plan to spur expansion in the world\'s fourth-largest economy, helping sustain global growth as the U.S., Europe and Japan teeter on the brink of recession. The funds, equivalent to almost a fifth of China\'s $3.3 trillion gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said today on its Web site. China will adopt a ``pro-active fiscal policy\'\' and pursue a ``moderately loose\'\' monetary policy, it said. China is taking steps to bolster its economy less than a week before Premier Wen Jiabao goes to Washington for talks with global leaders on ways to alleviate the world\'s biggest financial crisis since the Great Depression. People\'s Bank of China Governor Zhou Xiaochuan said yesterday boosting domestic demand is the best way China can help stabilize the economy. ``The downside risks to economic growth are significantly greater now than just a few months ago,\'\' said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong. ``China needs an aggressive fiscal stimulus package.\'\' The spending announced today, of which 100 billion yuan is earmarked for this quarter, will cover low-rent housing, infrastructure in the rural areas, as well as roads, railways and airports, the State Council said. The government will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies\' costs by an estimated 120 billion yuan. Manufacturing, Property Slump Wen is trying to stop China\'s economic slowdown from deepening as exports wane, manufacturing contracts and a property slump undermines domestic demand. The central bank has already cut interest rates three times in two months, reducing the one-year lending rate to 6.66 percent. Manufacturing contracted by the most since at least 2004 in October and export orders dropped to their lowest, according to CLSA Asia Pacific Markets. Home sales have plunged in major cities including Beijing and the stockpile of unsold new vehicles was at a four-year high in September. China\'s economy may grow 7.5 percent or less, the slowest pace in nearly two decades, in 2009, according to UBS AG and Credit Suisse AG. Last year, the expansion was 11.9 percent. ``The golden years have shuddered to a dramatic halt,\'\' said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.

Goldman Sachs this morning - We believe the earlier-than-expected announcement (well before the key Central Economic Working Conference which is to be held in late November/early December) and its strong tone is clearly a positive development. We believe it highlights the government’s heightened concerns about the rapidly worsening economic environment in recent weeks and their willingness to take necessary measures to prevent the economy from slowing significantly in the coming quarters. Alongside recent shifts in monetary policy—and the recent moves to ease policy in other parts of the world—this is clearly another significant step towards combating global economic risks and one that we have argued for some time was ultimately likely to be forthcoming. But uncertainties over the exact size of the stimulus remain While the announcement clearly signals a new phase of policy action in China, we do think that considerable uncertainties over the ultimate size of the stimulus still remain despite the headlines that are being quoted in the press.