China to get $600bn economy boost

[Imran Khan]

China to get $600bn economy boost


China's growth slowed to nine per cent in the third quarter, the lowest level in five years


The Chinese government has announced a nearly $600bn stimulus package to boost its economy amid recession fears following the global financial crisis.China's state council, or cabinet, approved the 4 trillion yuan ($586bn) measure, a statement on the government's website said on Sunday.

The plan was announced ahead of Hu Jintao, the president, visiting Washington to push Western leaders to give poorer countries a bigger role in global financial institutions at a November 15 summit of the Group of 20 major economies on the global financial crisis.

In Brazil on Sunday, finance ministers and central bank governors representing 90 per cent of the world's economy said they would take "all necessary measures" to get financial markets back to normal and counter the fallout from the credit crisis.

World leaders meet on Saturday to discuss those measures and also how much more say emerging economies will have over global finance.

China, the world's fourth biggest economy, is hoping its multi-billion dollar package will stimulate domestic consumer demand in the face of shrinking exports, as foreign markets contract in the financial crisis.

"China has decided to adopt an active fiscal policy and moderately easy monetary policies to foster fast but steady economic growth by expanding domestic demand," the statement said.

Key areas

Key areas
The stimulus package will focus on 10 areas, including:

Low-cost housing

Rural infrastructure

New railways, roads and airports

Health

Education

Environmental protection

Rebuilding disaster-hit areas

Removing credit limits for commercial banks to spur lending

Cutting taxes for enterprises

The statement said the spending until 2010 would focus on 10 areas, including on low-cost housing and rural infrastructure.

Money will also be poured into new railways, roads and airports, health and education as well as on environmental protection.

Spending on rebuilding disaster-hit areas, such as Sichuan province where 70,000 people were killed and millions left homeless by a massive earthquake in May, will also be sped up.

That includes nearly $3bn planned for next year that will be moved up to the fourth quarter of this year.

The statement said some of the money will come from the private sector but did not say how much, nor did it say how much of the package would be on new projects and how much for ventures already in the pipeline that will be sped up.

Credit limits for commercial banks are to be removed to channel more lending to priority projects and rural development, and reform of the value-added tax system will cut taxes by $17.5bn for enterprises, the government statement said.

Feeling the pinch

China's export-driven economy is starting to feel the impact of the economic slowdown in the US Europe, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion.

Economic growth slowed to nine per cent in the third quarter this year, the lowest level in five years and a sharp decline from last year's 11.9 per cent.

That is considered dangerously slow for a government that needs to create jobs for millions of new workers who enter the economy every year and to satisfy a public that has come to expect steadily rising incomes.

Exports have been growing at an annual rate of more than 20 per cent but analysts expect that may fall as low as zero in coming months as global demand weakens.

The plan to bolster the economy has been welcomed by Dominique Strauss-Kahn, head of the International Monetary Fund (IMF), who said it would have a positive effect on the world economy.

The cabinet's statement on moving towards a "moderately easy" monetary policy sparked speculation that it would further reduce borrowing costs following three successive rate cuts since September.

"This is pretty major," said Arthur Kroeber, head of Dragonomics, a Beijing economic consultant.

"It reflects the official view of how serious this problem is and shows that this is a government that can mobilise enormous resources to stimulate the economy when they put their minds to it."

The approach mirrors policy moves during the Asian financial crisis in the late 1990s, with some analysts predicting the Chinese economy will suffer much more in the current downturn.

"The economic situation China is facing now is far more grave than in 1998. There could be more co-ordination with other central banks as China is more exposed to the external environment," said Xing Ziqiang, a Beijing-based economist with China International Capital.

"In 1998, it was mainly Asian countries, including some competitors of China, that ran into trouble. But this time it's China's export market - America and Europe."

 

[daredevil]

I think Chinese are sweating over the likely recession. India, next in line, I guess.

 

[su-47]

I think Chinese are sweating over the likely recession. India, next in line, I guess.

Definitely. All the BRIC countries and other emerging economies will feel the pinch of the financial crisis. We will see reduced growth rates for the next 12 months. At least.

Everybody better pray that the financial crisis is solved as soon as possible.

 

[pkpatriotic]

China seeks stimulation
Nov 10th 2008 | BEIJING

A stimulus plan to inject $586 billion into China's economy. But the devil lies in the detail

WITH one eye turned towards keeping its own economy on track and the other trained fearfully on the impact of the global economic downturn, China has announced a four trillion yuan ($586 billion) stimulus package, the largest in the country’s history.

Unveiled by China's State Council on the evening of Sunday November 9th, the two-year spending initiative will inject funds into ten sectors, including health care, education, low-income housing, environmental protection, schemes to promote technological innovation, and transport and other infrastructure projects. The government also says that some of the spending will be directed to reconstruction efforts in areas battered by natural disasters, such as Sichuan province which was devastated by a massive earthquake in May.

“Over the past two months, the global financial crisis has been intensifying daily,” the State Council said in a statement. “In expanding investment, we must be fast and heavy-handed.” News of the stimulus package has been welcomed by global investors. Asian and European stockmarkets rose on Monday, with American markets also climbing. China's decisive move is likely to please foreign governments which are now grappling with the global downturn. It comes a few days before the Chinese president is scheduled to attend a global economic summit in Washington, DC, and a day after Hu Jintao had spoken by phone to the American president-elect, Barack Obama, about the global economic crisis and other issues.

China’s government has so far provided few details of when the money will be spent or how it will be divided. Officials do say that fourth quarter investment for this year will total 400 billion yuan, including 20 billion yuan brought forward from next year's central government budget. If fully realised, the two-year spending spree would amount to about 16% of China's annual gross domestic product.

The newly announced measures also include a loosening of credit policies and tax cuts. The plan calls for reforms in the country’s value-added tax regime that would save industry 120 billion yuan, according to an estimate by the government. Credit ceilings for commercial banks are to be abolished in the hope of channelling more capital to small enterprises, rural areas and unspecified “priority projects”.

The government is concerned about the potential for frivolous or speculative investments, so the State Council also decreed at its meeting on Sunday that credit expansion must be “rational” and should “target spheres that would promote and consolidate the expansion of consumer credit.” Finding ways to get Chinese consumers spending should be a priority. Unleashing domestic demand has been a longstanding goal of Chinese policymakers, but Chinese consumers—with few of their health-care or retirement needs reliably met either by employers or the state—often prefer to save.

China has sustained double-digit economic growth rates over the past five years but the economy has been slowing, considerably in some sectors. The economy logged a growth rate of 11.9% last year, but many forecasters believe that it will dip below 10% this year, with fourth-quarter growth down to 6% or even lower.

Growth rates in that range may be the envy of recession-battered economies, but mark signs of trouble for China. It is an article of faith among many economists—and a view publicly stated earlier this year by the Chinese prime minister, Wen Jiabao—that China needs a growth rate of at least 7% to avoid massive unemployment. The country has been hurt in recent months by softening export markets, depressed domestic property values and stockmarkets, and declining consumer and investor confidence.

Much remains unclear about the implementation of the stimulus plan—even its size. According to Sherman Chan, a Sydney-based economist with Moody's, the real size of the package may not be as large as the government has described. “Some of the measures announced in the stimulus package appear to have been already introduced or even implemented earlier. Hence, the size of this stimulus package—which is expected to be in the form of additional spending—may have been overstated,” Chan wrote in a research note.