China pledges $580 billion -- Lessen recession impact

November 10, 2008

China pledged 4 trillion yuan, about $580 billion, to stimulate its economy in the wake of the world's financial crisis. This should help lessen the impact of a global recession.

The funds, which represent 20% of China's annual GDP, will be spent over the next two years. China's average 10% economic growth per year has contributed nearly 30% of total global growth. Thus, their continued economic expansion is critical to soften the impact of a worldwide recession.

China will spend 100 billion yuan in the next 90 days towards low-rent housing, infrastructure in rural areas and construction of roads, railways and airports. It will also allow tax deductions of machinery, which will save businesses 120 billion yuan.

China will also raise both subsidies and grain prices for farmers, as well as allowances for low-income urbanites. It will eliminate loan quotas to increase small business lending.

What China's economic stimulus means:

The stimulus should add 2% to China's economic growth next year, keeping it at about 9%. It should also lift the stock market, which has dropped 69% this year as measured by the CSI 300 Index. (Source: Bloomberg, China Unveils 4 Trillion Yuan Spending as World Faces Recession, November 10, 2008)

China has been taking a leadership role in attacking the economic slowdown, dropping interest rates three times in two months. Taiwan followed the lead of its largest trading partner by cutting interest rates four times in two months.

China's emerging leadership role in the global economy means it may do no more than pay lip service when President Hu Jintao meets with President-elect Barack Obama, who plans to discuss China's exchange rate policy. China will also likely play a leadership role at next week's U.S. sponsored G-20 economic summit meeting in Washington.

Action steps:

Although now is not yet a good time to begin reinvesting in the stock market, when the tide does turn be sure to add emerging markets to your portfolio. China's moves to add infrastructure and help farmers and rural areas will only help it when the economy does turn up again.

Read more articles about China's economy in Growth of Chindia, a WorldMoneyWatch Top Ten Trend.

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