China Announces $586 Billion Stimulus Package

China’s government announced a two-year stimulus exceeding 4 trillion yuan, or $586 billion, in spending and stimulus measures through the end of 2010 aimed specifically to target people’s livelihood in order to offset the impact of slowing global growth and unlock the spending power of its vast population.

It was unclear how much the plan, which will target 10 areas from rural infrastructure to low-cost housing, represents new spending and how quickly it can stimulate domestic demand.

The government also will adopt an “active” fiscal policy — meaning it will spend money and cut taxes — while the central bank will set a “moderately easy” tone that appears to signal further interest rate cuts and efforts to make banks boost lending, Xinhua said.

Economists say that while China remains a hopeful source of global growth, its momentum is pulling back more quickly than anticipated. Property prices are under downward pressure, factories are closing as export orders dry up and foreign direct investment is being called into doubt.

In Sunday’s statement, the government said that among its earmarks will be money for transportation networks, ecology, technical innovation and post-disaster reconstruction. Few specific details on the spending plans were immediately announced.

Other measures include a restructuring of value-added taxes that Xinhua said will reduce business taxes by 120 billion yuan annually. The government will also look for banks to boost lending, removing a government-set lending ceiling and encouraging them to offer credit to smaller businesses, rural borrowers, technical innovators and buyout-oriented firms.

Many economists have been looking for Beijing to unveil a big stimulus package similar to the one it relied on during the Asian Financial Crisis more than a decade ago. Then, Beijing issued massive amounts of domestic bonds to pay to extend highways, repair airports and build ports, a program that was deemed a strong success.

Just a year ago, China had adopted an unprecedented “tight” monetary policy, a step up in its three-year effort to keep the fast-growing economy from barreling out of control because it was expanding too quickly.

SS