Tuesday, November 11, 2008

China stimulus plan fuels hopes for new investments

Published: Tuesday November 11, 2008

Stocks surge

China's massive stimulus package is its "biggest contribution to the world," Premier Wen Jiabao said Monday, as hopes rose that heavy spending on construction and other projects would help support global growth by fuelling demand for imported machinery and raw materials.

With Sunday's announcement of the four trillion yuan (US$586 billion) package, China staked out a bold position as President Hu Jintao prepared for next weekend's Washington meeting of leaders of 20 major economies to discuss a response to the global financial crisis.

"China has really set the pace for expansionary policies elsewhere," said Tim Condon, Asia regional economist for the Dutch bank ING.

Stocks rose

Stocks rose in major markets on news of the stimulus. US shares opened strongly, but later retreated.

The FTSE 100 index of leading British shares finished up 38.96 points at 4,403.92.

The DAX closed up 87.07 points, or 1.8 per cent, higher at 5,025.53. And France's CAC-40 gained 36.63 points, or 1.1 per cent, to close at 3,505.75.

Asian stock markets surged Monday on news of the plan. Japan's Nikkei index rose 5.8 per cent and Hong Kong's Hang Seng index gained 3.5 per cent. In China, the Shanghai Composite index jumped 7.3 per cent to 1,874.80.

Wen, the country's top economic official, said the plan is meant to boost investment and consumer spending, maintain export growth and promote corporate competitiveness and financial reform, state television reported on its national evening news.

It said he made the comments at a meeting of government leaders.

"We must implement the measures to ensure a fast and stable economic development," Wen said in comment read by an announcer.

"They are not only the needs of the development of ourselves, but also our biggest contribution to the world."

The plan calls for higher spending through 2010 on airports, highways and other infrastructure, more aid to the poor and farmers and tax cuts for exporters.

That could boost demand for iron ore from Australia and Brazil, factory and construction equipment from the United States and Europe and industrial components from throughout Asia.

"Faster growth in China will be better for its neighbours. For every country in the region, it's either their top trading partner or is on the way to becoming the top," Condon said.

On a global scale, "countries that supply capital equipment look like they will be the front line beneficiaries of this package."

The dramatic Chinese plan was motivated by growing government alarm at an unexpectedly sharp downturn in the country's fast-growing economy that raised the threat of job losses and social unrest.

Economic growth slowed

China's economic growth slowed to 9 per cent in the last quarter, down from last year's stunning 11.9 per cent growth and its lowest level in five years.

Export orders have fallen sharply as global demand weakens, leading to layoffs and factory closures.

Analysts have slashed forecasts of next year's economic growth but said Monday that with the new stimulus it should be at least eight per cent.

The slowdown has rippled through Chinese industries and outward to foreign suppliers.

China is the world's biggest steel producer, but mills responded to weaker demand this year by cutting output 20 per cent, which eroded demand for imported ore.

The spending package is "definitely positive news for all steel companies.

It will boost demand for steel and iron," said a spokesman for steelmaker Beijing Shougang Group, who would give only his surname, Wu.

China's announcement came as economic officials from the Group of 20 leading economies, which includes major wealthy and developing nations, called Sunday for increased government spending to boost the troubled global economy.

At the weekend meeting in Brazil, G20 finance ministers and central bank governors also said emerging economies deserve a prominent role in talks to overhaul the world financial system.

Hu plans to press that demand in Washington at the leaders' meeting on Saturday, a Chinese government spokesman said last week.

Beijing's stimulus package represents another drastic step away from lending curbs and other anti-inflation measures that it imposed over the past three years, but has been rolling back since mid-2008 as growth slowed.

Wholesale inflation eased in October, which gives authorities more leeway to stimulate the economy without igniting new price rises, according to data reported Monday. The government said producer prices rose 6.6 per cent in October from the year-earlier period, down from August's 12-year high of 10.1 per cent.

China switched its official goal in mid-2008 from a single focus on fighting inflation to a dual target of ensuring fast economic growth while also containing price rises.

Source: Jamaica Gleaner

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