By Li Yanping and Chia-Peck Wong
Nov. 10 (Bloomberg) -- China, the biggest contributor to world growth, unveiled a 4 trillion yuan ($586 billion) plan to sustain its economy, spurring gains in stocks, metals and oil.
China's cabinet pledged ``fast and heavy-handed investment'' in housing and infrastructure through 2010 and a ``relatively loose'' monetary policy, according to a State Council statement yesterday.
Copper jumped more than 8 percent and Asian stocks rallied on optimism the package will limit the depth of a looming global recession and encourage coordinated efforts to revive growth. President Hu Jintao will join crisis talks with world leaders this weekend in Washington, where President-elect Barack Obama has pledged to pass stimulus measures.
``This plan is, by all measures, too large to be ignored,'' said Kevin Lai, an economist at Daiwa Institute of Research in Hong Kong. China may ``help the rest of the world by creating more demand for foreign goods and services.''
China's CSI 300 Index of shares closed 7.4 percent higher, the biggest increase in seven weeks. Copper gained as much as 8.4 percent in London. Crude oil, the MSCI Asia Pacific Index of shares, and some Asian currencies also climbed.
China accounted for 27 percent of global economic growth last year, according to International Monetary Fund estimates. The government didn't say how much spending was previously allocated and indicated some will be private investment.
`Diplomatic Initiative'
``If the Chinese use this as a diplomatic initiative, it could be an important step toward a more coordinated response,'' Simon Johnson, a senior fellow at the Peterson Institute for International Economics and former chief economist of the IMF, said in Boston.
China's gross domestic product grew 9 percent in the third quarter, the slowest pace in five years, as export orders and industrial production waned and property slumped.
``Over the past two months, the global financial crisis has been intensifying daily,'' the State Council said in yesterday's statement. ``In expanding investment, we must be fast and heavy-handed,'' it said, adding that the central bank will pursue a ``moderately loose'' monetary policy.
The central bank has already cut interest rates three times in two months, reducing the one-year lending rate to 6.66 percent, and Governor Zhou Xiaochuan flagged yesterday that more reductions may be on the way.
`Urgent' Action
Group of 20 nations, including China, are ready to act ``urgently'' to tackle the global slump, finance ministers said after a weekend meeting in Sao Paulo.
China's extra spending may boost the nation's economic growth by 2 percentage points next year, said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. Before yesterday's announcement, UBS AG and Credit Suisse AG forecast GDP would rise no more than 7.5 percent next year, the smallest increase in nearly two decades.
``There is still a risk that an increasingly market-driven economy corrects faster than the fiscal package can be implemented,'' said Ben Simpfendorfer, an economist at Royal Bank of Scotland Group Plc. ``We need to see evidence in the coming months that the fiscal package is either spurring demand or bolstering sentiment.''
China's plan is the equivalent of about 80 percent of government spending last year.
The package earmarks 100 billion yuan of central- government spending this quarter for low-rent housing, infrastructure in rural areas, roads, railways and airports. Investment by local governments and companies may boost that to 400 billion yuan, the State Council said.
Cutting Taxes
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.
Grain purchase prices and subsidies for farmers will be raised, along with allowances for low-income urban households. The government also said it had scrapped loan quotas, which limited lending by banks, to help small businesses.
China's move comes as central banks around the world slash interest rates to revive their economies.
The Federal Reserve, the European Central Bank, the Bank of Japan and the People's Bank of China have all lowered rates in the past two weeks. Taiwan, which counts China as its largest trading partner, cut rates late yesterday for the fourth time in two months.
Chinese 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.
``The golden years have shuddered to a dramatic halt,'' said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.
To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.netChia-Peck Wong in Hong Kong at cpwong@bloomberg.net
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