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China Okays $586 Billion Economic Stimulus

China's cabinet has approved a massive stimulus package worth 4 trillion yuan ($586 billion) through 2010 to boost domestic demand, the official Xinhua news agency said on Sunday.

China, Chinese Flag
CNBC.com
China, Chinese Flag

Investments will be targeted at infrastructure, social welfare and other key sectors as part of an "active" fiscal policy, Xinhua said.

It did not say how the extra spending would be financed.

China ran a consolidated budget surplus in the first half of the year of more than $170 billion, but tax revenue growth is slowing sharply as the economy reels under the impact of the global credit crunch.

The cabinet also announced an explicit shift in monetary policy, which it now described as "moderately easy."

The People's Bank of China has already cut interest rates three times since mid-September and scrapped lending quotas in a bid to support the economy.

Lending to small and medium enterprises will be increased as part of the plan, Xinhua said.

Officials have been flagging measures to pump up demand since gross domestic product growth slowed unexpectedly sharply to 9.0 percent in the third quarter from 10.4 percent in the first half.

Indicators for October have been even weaker.

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.

Sector 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.