The 'new deal' will focus on China's domestic market and may keep the economy expanding at a fast rate, writes Clifford Coonanin Beijing
A FOUR-trillion-yuan (€460 billion) economic stimulus plan for China's economy, widely hailed as a "new deal" with Chinese characteristics, sparked a rally in Asian stocks yesterday and triggered an upswing in everything from US index futures to oil prices.
The group of G20 leading nations had called on China to come to the rescue and Beijing delivered in spades. The stimulus package, which is spread over two years, will loosen restrictions on credit, cut taxes and boost infrastructure spending on projects to build low-income housing and rural development.
Beijing, sitting on a war chest of €1.43 trillion in hard-currency reserves, is spending nearly a fifth of annual gross domestic product on the revival plan, which comes amid fears that demand for Chinese exports will fall as consumption in the West slumps.
Investors seem to be cheered by the idea that China's economy will keep expanding at a fast rate despite the global slowdown, and help prop up neighbouring economies too.
While details of the plan have not been disclosed, the state council, or cabinet, has already signed off on it. It is strategically significant as it marks a turning inward to China's domestic market, after focusing for so many years on selling goods abroad.
The markets were not thinking in terms of the longer term effects. The stimulus plan gave a speedy shot in the arm to construction machinery stocks in Japan, resource shares in Australia and cement stocks on the Shanghai stock exchange, while oil prices rose to $64 a barrel in Asian trading after falling steadily since the start of the economic crisis.
Shanghai's index rose 7.3 per cent, while the Hang Seng index in Hong Kong closed up 3.5 per cent. The Nikkei ended 5.8 per cent higher.
The move by China came after G20 leaders said governments needed to use monetary and fiscal policy to support economic growth.
The plan was announced days before a US meeting of G20 leaders aimed at resolving the global financial crisis.
Economic growth in China fell in the first nine months of the year, although it still rose nearly 10 per cent. The economy is widely expected to expand by less than 10 per cent for the first time in six years this year, and could fall to 8 or 9 per cent next year. The economy needs growth at about 8 per cent to keep creating jobs.
It is also probably not the last word from China. The country's central bank governor Zhou Xiaochuan said in São Paolo, Brazil, at the weekend that Beijing would most likely use more reductions in interest rates before the year-end, in addition to the stimulus spending plan, to ensure China's economy did not grow by less than 8 per cent next year.
