Aug. 19 (Bloomberg) -- China's government is considering spending as much as 400 billion yuan ($58 billion) to stimulate the economy and may ease monetary policy this year, said Frank Gong, head of China research at JPMorgan Chase & Co.

Measures would include tax cuts, stabilizing capital markets and supporting the housing market, Hong Kong-based Gong said in a research note today.

Since July, Chinese policy makers have put extra emphasis on sustaining growth rather than cooling inflation in the world's fourth-biggest economy as the outlook for exports dims. Economic growth has cooled for four quarters and industrial output grew last month at the slowest pace since February 2007.

``The top leadership is carefully considering an economic stimulus package,'' Gong said. He didn't cite a source and wouldn't comment when telephoned. Gong correctly predicted in 2005 that China would scrap the yuan's peg to the dollar.

The measures would cost 200 billion yuan to 400 billion yuan, or 1 percent to 1.5 percent of gross domestic product, the economist said.

``This is in addition to the cost of rebuilding Sichuan earthquake zone, with the budget of 500 billion yuan to 600 billion yuan,'' he said.

The central bank will ease monetary policy ``later in the year'' as inflation eases and growth in China's foreign-exchange reserves begins to slow, Gong said. It will cut the portion of deposits banks are required to hold as reserves from a record 17.5 percent, he said.

Power Prices

China's currency reserves, the world's largest, rose 36 percent to $1.81 trillion at the end of June from a year earlier. Inflation cooled to 6.3 percent in July from a 12-year high of 8.7 percent in February.

China will raise electricity prices and ``reform'' gasoline and diesel prices after the Olympic Games, Gong said without elaborating. The prices are controlled by the state.

Government statements last month dropped references to a ``tight'' monetary policy.

The central bank has kept interest rates unchanged this year after six increases in 2007, trying to avoid attracting more money from abroad to an economy already flooded with cash.

In July, it eased lending quotas for national banks by 5 percent and regional lenders by 10 percent, according to reports by Goldman Sachs Group Inc., BNP Paribas SA, China Merchants Bank Co., and Industrial Bank Co.

Quarterly Expansion

China's economy grew 10.1 percent in the second quarter, still the fastest pace of the world's 20 biggest economies. Gross domestic product expanded 11.9 percent last year.

Export and investment growth accelerated last month and retail sales increased by the most since at least 1999. While consumer price-gains eased, producer prices rose at the fastest pace since 1996. Weaker production growth may foreshadow softening demand for Chinese goods as the U.S., Japanese and European economies falter.

The central bank said Aug. 15 that it would ``fine-tune'' monetary policy as cooling overseas demand for the nation's goods poses risks to the economy.

To contact the reporter on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net;

Last Updated: August 19, 2008 06:37 EDT