MercoPress. South Atlantic News Agency

China surprises world with 586 billion USD stimulus package

Beijing announced Sunday a stimulus package equivalent to 586 billion US dollars in its biggest move to cushion the impact of the global financial crisis hitting the world's fourth-largest economy.

A statement on the government's Web site said China's Cabinet had approved a plan to invest the amount (equivalent to a fifth of China's GDP) in infrastructure and social welfare by the end of 2010. The statement did not say how much of the spending is on new projects and how much is for ventures already in the pipeline that will be speeded up. China's export-driven economy is starting to feel the impact of the economic slowdown in the United States and Europe, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion. Economic growth slowed to 9% in the third quarter, the lowest level in five years and a sharp decline from last year's 11.9%. That is considered dangerously slow (the threshold in considered 8.5%) for a government that needs to create jobs for millions of new workers who enter the economy every year and to satisfy a public that has come to expect steadily rising incomes. Exports have been growing at an annual rate of more than 20% but analysts expect that may fall as low as zero in coming months as global demand weakens. The statement said the Cabinet, at a meeting chaired by Premier Wen Jiabao had "decided to adopt active fiscal policy and moderately easy monetary policies" but did not give further details. However it pointed out that rural and urban incomes would be increased. The statement said the spending would focus on ten areas including spurring spending on low-cost housing â€" an urgent need in many parts of the country â€" as well as increased spending on rural infrastructure. Money will also be poured into new railways, roads and airports. Spending on health and education will be increased, as well as on environmental protection and high technology. Credit limits for commercial banks will also be removed to channel more lending to priority projects and rural development plus reform of the value-added tax system will cut taxes by 17.5 billion UDS for enterprises, the statement said. The plan was announced before President Hu Jintao goes to Washington to push Western leaders to give poorer countries a bigger role in global financial institutions at a November 15 summit of the Group of 20 major economies on the financial crisis. The announcement also surprised the Group of 20 Finance and Central Bank officials meeting in Sao Paulo, Brazil in preparation for the Washington summit. A communiqué from the Sao Paulo meeting called, among other things, for co-ordinated action to tackle the financial crisis. China's finance minister was scheduled to attend this weekend's G20 meeting in Sao Paulo, but was called back to Beijing to address what the Chinese press cited as pressing issues. The BRIC countries -- Brazil, Russia, India and China -- are seen to now have the resources to help rescue the reeling established economies, led by the United States, where the current crisis began. The stimulus plan also thwarts a growing idea that China and its almost two trillion USD of international reserves could help save the global banking system, an idea which apparently according to some press reports could be on the table next weekend in Washington. Writing in the Financial Times, US-based economist Arvind Subramanian suggested the US could borrow some of China's huge reserves. "The Chinese government could offer to lend up to 500 billion USD to the US government for the rescue of its financial sector," wrote Mr Subramanian, of the Peterson Institute for International Economics. In fact the Chinese have already been doing something similar for a number of years. Beijing has been buying up US government debt, which has allowed the US to spend beyond its means. But Chinese economists have said that while Beijing is ready to play its part in the rescue efforts, it will not be writing any blank cheques.