China Unveils $586-billion Economic Stimulus Plan

China's stunning $586-billion (4-trillion Yuan) economic stimulus package, unveiled Sunday evening, aims to give the country's domestic demand and global GDP a massive shot in the arm. This should also give commodities and commodity stocks a mighty boost. Here are a few excerpts from the Wall Street Journal on the subject:

The announced sum of four trillion yuan represents about 16% of China's economic output last year, and is roughly equal to the total of all central and local government spending in 2006. New spending of even half that amount would be substantial next to China's six trillion yuan annual budget for this year.

The plan includes spending in housing, infrastructure, agriculture, health care and social welfare, and features a tax deduction for capital spending by companies. China's economy won't be able to absorb so much spending immediately: Economists expect one or two more quarters of slowing growth at a minimum before a rebound could take hold.

With the announcement, China will enter a meeting Saturday of the Group of 20 largest economies with a plan that would dwarf stimulus measures by others in the group, which is convening in Washington to discuss ways to stem a global slowdown in growth.

...

In the new stimulus package, total new investment could be less than the headline figure of four trillion yuan, since the plan does appear, for instance, to incorporate rebuilding programs for the areas affected by May's massive earthquake. Those have already been allocated one trillion yuan in funds.

Although Chinese officials have been meeting daily on the financial crisis, most observers hadn't expected leaders to reach final consensus on a stimulus plan until an annual economic-policy meeting scheduled for the end of this month. The rapidity of the response underscored the government's concern about the growing risks of a real downturn.

A stimulus this large comes once in a generation, or two, as does the opportunity, especially when the margin of safety is this high. As of Friday November 7, 2008, the Shanghai Stock Exchange Index was down 72% from October 16, 2007 peak closing of 6,092 points, having closed at 1,747 points, and roughly 44% below its 200-day moving average of 3,120 points.

Other packages have been relatively in the same ballpark, but set to span much longer periods of time, like ten years. A few years ago, for example, China earmarked 2.7-trillion Yuan ($300-billion) towards augmenting the country's railroads, a sum to be invested over ten years.

Giving details of the package, Xinhua said China would invest an additional 100 billion yuan in national construction this quarter and would earmark an extra 20 billion yuan next year for reconstruction in areas hit by major natural disasters.

Sectors that will benefit from the extra spending include affordable housing, rural infrastructure, transport networks, environmental protection and technical innovation, Xinhua said.

The cabinet also confirmed a long-awaited reform to the way value added tax is calculated. The result will be to reduce companies' tax bill by 120 billion yuan a year, the agency added.

This sum, a grand total of 4-trillion Yuan ($586-billion) is set to be dispensed over 2 years. You do the math...this is enormous.

Click for the complete WSJ.com article here [PDF]


Sources: Reuters

WSJ, China Sets Big Stimulus Plan In Bid to Jump-Start Growth

http://online.wsj.com/article/SB122623724868611327.html

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