World takes heart as dragon roars

Wen Jiabao says the increase in spending is an attempt to turn around the economy, which is still growing but has slowed for six straight quarters. Photo / AP

Chinese Premier Wen Jiabao has buoyed international markets by reaffirming his commitment to an economic growth target of 8 per cent and increasing government spending.

Wen's report to lawmakers, the equivalent of a US State of the Union speech, outlined plans to increase fiscal spending by 22 per cent this year to 7.62 trillion yuan ($2.22 trillion).

But Wen stopped short of announcing an increase to the Government's existing 4 trillion yuan stimulus package.

Public spending, mostly on infrastructure, will more than double in 2009 to 908 billion yuan.

Social welfare spending will rise 17.6 per cent and science and technology investment will climb 25.6 per cent. The Government is more than doubling a development fund for small businesses to 9.6 billion yuan.

"We face unprecedented difficulties and challenges," Wen told delegates to China's parliament in Beijing. The nation needed to "reverse the economic slide as soon as possible".

Markets around the world - already up on expectations of the speech - reacted positively. Tokyo's Nikkei was most upbeat closing up 2 per cent. In Australia, the ASX 200 closed up 0.7 per cent and New Zealand's NZX-50 closed up nearly 1 per cent.

China's export collapse has dragged the economy to its weakest growth in seven years and cost the jobs of 20 million migrant workers, adding to the risk of social unrest.

The 8 per cent growth target is more optimistic than the International Monetary Fund's forecast that the nation's economy will grow 6.7 per cent, the least in almost two decades.

The 2009 budget deficit was set at 750 billion yuan, widening to a record 950 billion yuan including local-government bonds, as the slowdown cuts revenue and the Government spends to revive the economy. The deficit will be within 3 per cent of gross domestic product.

China is targeting inflation of 4 per cent, compared with an actual rate of 5.9 per cent in 2008, Wen's report showed.

Weaker growth and falling commodity prices have increased the likelihood of deflation for part of this year.

The global financial crisis "is still spreading and is yet to bottom out", said Wen, adding that a trend towards global deflation was becoming more obvious. Trade protectionism was also rising.

While China's economy is the only one of the world's five biggest still growing, the pace has slowed for six straight quarters. The expansion in the three months through December was 6.8 per cent from a year earlier, compared with 13 per cent for all of 2007.

Wen's report contrasted with a year earlier, when he pledged to rein in lending and growth in money supply to cool inflation and prevent the economy from overheating. This year, the Government spurred a record jump in new loans in January by pressing banks to support the stimulus programme.

"There will be a sizeable stimulus occurring in the economy this year," said Glenn Maguire, an economist at Societe Generale in Hong Kong.

The stimulus package announced in November spans spending through 2010 on public housing, railways, highways, airports, power grids and reconstruction work after last year's earthquake in Sichuan province.

The Communist Party's Politburo pledged last month a "massive" increase in government investment this year and Standard Chartered Bank said this week that the stimulus package might be doubled. The central Government spent 100 billion yuan in the fourth quarter of last year and will add 130 billion yuan this quarter.

A railway between Shanghai and Nanjing, a Xiamen-Zhangzhou cross-sea bridge, and a high-speed rail link between Datong and Yucheng in Shaanxi are among the projects, according to a summary by Standard Chartered Bank.

Besides spurring investment, policymakers need to revive a sagging property market and boost consumption as the global recession smothers demand for exports of toys, textiles and electronics.

The fastest contraction in the US since 1982 is taking a toll on Chinese exporters including Lenovo Group, the world's fourth-biggest personal computer-maker, which reported its first quarterly loss in three years and cut jobs.

With 20 million rural labourers who previously found jobs in cities now unemployed, and 7.1 million college graduates seeking work, authorities are alert to the danger of social unrest.

"Mass incidents" may jump this year, the official Xinhua News Agency's Outlook Magazine reported in January, employing communist code for riots and civil disorder. Last month, a clash between police and about 1000 protesting workers from a textile factory in Zigong City, Sichuan province, left six demonstrators injured.

Committed to growth
* China is still aiming for 8 per cent GDP growth in 2009.
* Its Government has already committed to a stimulation package worth US$585 billion.
* Yesterday plans to increase government spending by 22 per cent buoyed international markets.

- BLOOMBERG