China Rescue Plan Bolster World Economy

Nov. 11 -- China's massive effort to shore up its domestic economy may also do the world a favor.

"Very few countries are going to match this stimulus -- it's huge," said Nicholas Lardy, sr fellow at the Pe terson Institute for Int'l Economics in Washington.
In addition to propping up domestic industries, the m easures may give the world a cushion as the U.S., Europ ean & Japanese economies shrink.

The $586B stimulus package pushed the price of copper & silver higher yesterday & sent stocks soaring from H K to Frankfurt. The reaction was a sign of global depen dence on the $3.3 trillion Chinese eco., w/c accounted for about a quarter of world growth last yr & consumed 41% of coal production.

The 10-pt plan allocates money for affordable housing , rural infrastructure, railways, power grids, social w elfare to raise incomes & rebuilding after the May 12 S ichuan earthquake. China will also allow tax deductions for purchases of fixed assets such as machinery to sti mulate investment.

China may cut int. rates again after 3 reductions in the past 2 mos., central bank Governor Zhou Xiaochuan s aid after the package was unveiled. He's got extra room to move. Inflation cooled to 4% in Oct., the weakest p ace in 17 months, the gov't said today.

A new, looser monetary policy suggests "that money su pply will inc., liquidity will be ample, or int. rates on bank loans will be lower," Zhou told reporters at a meeting in Sao Paulo.

China's largest banks, w/ 4 trillion yuan ($486B) of cash, have resisted gov't efforts to boost lending to 4 2 million small & mid-size cos. that drove the eco. boo m of the past decade.

Copper gained as much as 8.4% in London yesterday, & the MSCI Asia Pacific Index of shares & some Asian curr encies also climbed. In Europe, mining cos. BHP Billito n Ltd. & Rio Tinto Group jumped more than 8%.

"The stimulus here was 1% of GDP, & there, it's 16% o f GDP," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, w/c manages $30B. "It is a big deal & therefore is a note of optimism esp. f or the global eco. And we're all hopeful it will help U .S. stocks as well, especially raw materials."

Booming demand in China spurred 6 straight yrs of gai ns for the UBS Bloomberg Constant Maturity Commodity In dex, a gauge of 26 raw materials. China is the world's biggest metals buyer & the 2nd-largest consumer of oil. Spending to expand Chinese railroads, electric grids & housing helped to more than quadruple the price of cop per & nickel from 2001 to 2007.

"China is the big swing factor for commodities," said Gisjbert Groenewegen, a fund mgr at NY's Gold Arrow Ca pital Management. "It's an extremely important market f or commodities because it's been the source of so much demand."

China's exports have quadrupled in 7 yrs & its trade surplus reached a record $262B last year. China is the world's 2nd-largest exporter behind Germany, the WTO sa ys. The country has averaged 9.9% growth for the past 3 0 yrs & its expansion underpins demand for the exports of its Asian neighbors & commodities from iron ore to s oybeans.

China contributed the most to global growth in 2007, 27%, the IMF said in an April report.

"If it had to, the gov't could easily afford to spend an extra 4 trillion to achieve" the 8% eco. growth it deems is necessary to prevent the jobless rate rising, said Mark Williams, an economist at Capital Economics i n London. "However, it is hoping that the signal it is giving w/ the announcement of this package will, in its elf, be enough to catalyze a revival in confidence & st ronger private sector spending."

(Bloomberg)