China plan may boost global economy

TOKYO — China's massive effort to shore up its domestic economy may do the world a favor.

"Very few countries are going to match this stimulus — it's huge," said Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington, D.C. "It's a very strong step and puts them in a commanding position in setting an example to other economies."

The $586 billion stimulus package, announced Sunday, pushed the price of copper and silver higher Monday and sent stocks soaring from Hong Kong to Frankfurt. The reaction was a sign of global dependence on the $3.3 trillion Chinese economy, which accounted for about a quarter of world growth last year and consumed 41 percent of coal production.

Asian stock markets were lackluster today, however, as concerns about the world economy sapped enthusiasm over China's stimulus plan.

The global financial crisis and resulting collapse in demand has led to a contraction in Chinese manufacturing and a slump in exports. In addition to propping up domestic industries, the measures may give the world a cushion as the U.S., European and Japanese economies shrink.

The 10-point plan allocates money for affordable housing, rural infrastructure, railways, power grids, social welfare to raise incomes and rebuilding after the May 12 quake.

The pledge came as leaders from the Group of 20 nations, which includes China, prepare to meet in Washington on Friday about the global economic crisis. "China showed the G-20 with this package that it is a big player in the world economy, capable of contributing to global economic stability," said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York.

While the rally was short-lived, the ripple effect showed immediately on world markets.

In U.S. trading Monday, Caterpillar, the world's largest maker of bulldozers and excavators, rose as much as 6.3 percent and Freeport-McMoRan Copper & Gold, the world's largest publicly traded copper producer, gained as much as 11.5 percent on optimism about Chinese construction spending.

"The stimulus here was 1 percent of GDP [gross domestic product], and there, it's 16 percent of GDP," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, which manages $30 billion. "It is a big deal and, therefore, is a note of optimism especially for the global economy. And we're all hopeful that it will help U.S. stocks as well, especially raw materials."

But even an economy the size of China's may not have the wherewithal to withstand the worst economic crisis since the Great Depression, said Ben Simpfendorfer, an economist at Royal Bank of Scotland Group.

"There is still a risk that an increasingly market-driven economy corrects faster than the fiscal package can be implemented," Simpfendorfer said

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in New York, estimates only a quarter of the package — $150 billion — represents new spending.

Still, yesterday's financial markets reflected the growing economic power of China and its 1.3 billion people. China passed Canada to become the largest source of imports into the United States last year, and since it joined the World Trade Organization (WTO) in 2001, it has been the fastest growing major export market for U.S. products, according to U.S. government data.

China's exports have quadrupled in seven years, and its trade surplus reached a record $262 billion last year. China is the world's second-largest exporter behind Germany, the WTO says. The country has averaged 9.9 percent growth for the past 30 years, and its expansion underpins demand for the exports of its Asian neighbors and commodities from iron ore to soybeans.

China contributed the most to global growth in 2007 — 27 percent, the International Monetary Fund said in a report in April.

"The government could easily afford to spend an extra 4 trillion to achieve" the 8 percent economic growth it deems is necessary to prevent the jobless rate rising, said London economist Mark Williams.