Monday, March 23, 2009

China’s Stimulus Spending to Help Growth Reach Target

By Irene Shen - March 22 (Bloomberg)

China’s stimulus spending may add as much as 1.9 percentage points to economic expansion and help the government achieve its growth target this year, according to the State Council’s research group.

“China has the ability to become the first in the world to step out of the crisis and keep stable growth for the mid and long term,” Zhang Yutai, director of the Development Research Center of the State Council, said in a live broadcast from the China Development Forum in Beijing today.

Vice Premier Li Keqiang reaffirmed China’s goal of 8 percent growth at today’s forum, saying some industries “have seen signs of recovery.”

China is targeting expansion in 2009 even as economies from the U.S. to Japan contract. The nation’s economy is showing “early signs” of stabilizing as government-backed investment counters a slump in exports, the World Bank said March 18.

Investment in China rose 26.5 percent in the first two months of 2009 and bank loans quadrupled in February, indications the government’s 4 trillion yuan ($585 billion) stimulus plan is starting to feed into the economy.

China’s government is battling to boost growth amid tumbling exports, rising unemployment, falling house prices and the risk of higher loan defaults. Millions of migrant workers have lost their jobs as declining overseas orders force factories to scale back production or shut.

Further Spending

Gross domestic product expanded 6.8 percent in the fourth quarter, the weakest pace in seven years. The economy grew 9 percent for all of last year, down from 13 percent in 2007.

“China has the potential to further boost domestic spending,” Zhu Zhixin, vice director of the National Development and Reform Commission, said at the forum, echoing comments by Premier Wen Jiabao on March 13.

Wen said China has “adequate ammunition” to revive the world’s third-biggest economy and can add to its 4 trillion yuan stimulus package at any time.

The government’s spending has resulted in a record 950 billion yuan budget deficit this year. The risk posed by the deficit is “under government control,” Wang Jun, vice minister of finance, said at the forum.

Not everyone shares China’s optimism it will reach the 8 percent target this year. The Organization for Economic Cooperation and Development may cut its forecast for the nation’s economic growth to as little as 6 percent, Secretary- General Angel Gurria said March 20, while the International Monetary Fund expects growth of 6.7 percent.

World Bank

The World Bank last week lowered its forecast for China’s economic growth this year to 6.5 percent from a November estimate of 7.5 percent.

Still, the lender said China is weathering the global slowdown better than many because the government quickly implemented its spending plan and its banks were largely unscathed by the financial crisis.

Financial companies worldwide have suffered more than $1 trillion of writedowns and credit losses since the market for subprime mortgages collapsed in 2007, forcing governments from the U.S. to Australia to announce stimulus packages.

The European Union economy will shrink 3.2 percent this year, the IMF said on March 19, cutting a January forecast of a 2 percent contraction. Japan’s economy is forecast to shrink by 5.8 percent, according to the IMF, while the U.S. is seen contracting 2.6 percent.