China to get $600bn economy boost

Government unveils package to boost domestic consumer demand amid recession fears.

    China's growth slowed to nine per cent in the third quarter, the lowest level in five years [GALLO/GETTY]

    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."

    SOURCE: Agencies


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