$858bn Package Seduces Markets

The Age

Tuesday November 11, 2008

VANESSA O'SHAUGHNESSY, INVESTMENT REPORTER

CHINA'S efforts to stimulate its economy have lifted equities markets, with investors betting the package of almost $US590 billion ($A858 billion) will increase global demand and reduce the severity of a global recession.

Australian shares, as measured by the S&P/ASX 200 Index, rose as much as 2.7%. But they closed 56.5 points, or 1.4%, higher at 4107.8 points.

Japan's Nikkei climbed 5.8%, Hong Kong's Hang Seng added 3.5%, and European markets rose on opening.

China unveiled an economic stimulus package of 4 trillion yuan to be spent over two years.

It is the equivalent of more than 15% of China's annual gross domestic product, and much bigger than the US stimulus package of $US168 billion, Japan's $US51.5 billion initiative and Australia's $10.4 billion.

The money will be spent on infrastructure projects and social welfare initiatives. And areas that were devastated by the Sichuan earthquake in May will be rebuilt.

National Australia Bank senior markets economist David de Garis said the "much-needed" package would support economic growth in the Asian region.

Commodity producers in Australia would benefit over time, he said.

Yesterday, Australian investors concurred. They pushed shares in diversified miner BHP Billiton more than 7% higher, to $29.89.

And shares in Rio Tinto gained almost 8%, to $78, even though the company announced it would reduce iron ore output at its West Australian mines by 10%.

Oil futures, which last week were as low as $US59.97 a barrel, were selling last night for $US63.60. And the price of gold was up by more than $US18 an ounce, to $US752.99 at one stage.

But ABN Amro Morgans' director of strategy and chief economist, Michael Knox, said the Chinese package was not an exercise in selflessness.

"China is not doing this program to save the world," he said, in a note to clients. "It is doing it to save itself.

"It is obviously the intention of the Chinese Government to grow domestic demand faster and to push their own economy harder."

China's economic growth is at its slowest in more than five years, having fallen to 9% in the third quarter. And the Chinese Government wants to maintain a growth rate of at least 8%.

"Weaker growth expectations for China have been one factor behind the severe weakness of the Australian dollar and domestic equity markets," said Thomson Financial chief economist George Worthington.

The International Monetary Fund is forecasting the Australian economy will expand just 1.8% this financial year.

Home-loan approvals slid for the eighth month in a row during September, falling 2.7% from August.

Markets are pricing in a 90% chance that the Reserve Bank will cut interest rates by a full percentage point at its December meeting.

But, the dollar, which last month fell to a low of US60.1, was last night buying just over US69.

Institutional investors eagerly bought up National Australia Bank shares, prompting the bank to increase the size of its placement from $2 billion to $3 billion. NAB confirmed a placement of 150 million new ordinary shares at $20.

© 2008 The Age

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