The possible stimulus package would be equivalent to 1.0 to 1.5% of GDP. “This will include tax cuts and measures to ‘stabilize domestic capital markets’ and support ‘healthy development of the housing market’,” Frank Gong, chief China economist for JPMorgan, said in a note to clients.

Gong said the package would be in addition to projected spending of 500-600 billion yuan to rebuild the parts of Sichuan devastated by May’s earthquake. Expectations of fiscal pump-priming have been growing since the Communist party last month switched its economic policy priority from avoiding overheating to supporting steady growth. Beijing is moving ahead with plans for energy price reform and most fuel and power prices will be liberalized after the Games, Gong added.

Hot money inflows into China are fading as the dollar strengthens, while inflation will continue to trend lower, he said. This would provide a favorable backdrop for the central bank to reduce banks’ reserve requirements, now at a record 17.5%, and ease monetary policy later in the year, he added. On the perpetual debate of how China should manage its $1.81 trillion of foreign-exchange reserves, Gong said Beijing may have intensified sales of some dollar assets.

But it aims to keep the bulk of its reserves in dollars — even if they are not invested in the debt of US mortgage agencies Fannie Mae and Freddie Mac — because it favors a strong US currency. Gong said it was unlikely that China would diversify into the euro, yen or commodity currencies in a big way as these currencies may already have peaked.

Instead, policy makers were studying a number of suggestions put forward by government researchers, including: — repatriating the money and investing it in on physical and social infrastructure to boost consumption; — using some of the money to set up a fund to stabilize the stock market, which is down 62% from October’s record high; — diversifying into dollar-bloc currencies such as the Hong Kong dollar and other Asian markets. However, the biggest question for Asian and other emerging markets would be liquidity, Gong said. (Reuters)