HONG KONG - Chinese Premier Wen Jiabao, in a keenly anticipated speech to the
country's top legislative assembly on Thursday, offered barely enough to
maintain optimism in China's ability to weather the global downturn, even as he
declined to announce new plans to stimulate the economy.
China's mainland stock markets, which had surged about 6% on Wednesday on the
prospect of a new stimulus package being announced to the National People's
Congress (NPC), faltered before recovering in late trading.
Wen pledged to the 11th NPC in Beijing that China, the world's third-biggest
economy, would maintain growth at about 8%, a rate seen by many analysts as the
minimum necessary to absorb new
workers and avoid social unrest as millions are laid off amid the global
economic downturn.
Investors had expected a spending package on top of the 4 trillion yuan (US$584
billion) stimulus announced last November and to be spent over the next two
years. Instead, they heard Wen outline plans, not clearly part of that package
or in addition to it, that included a lower tax burden for individuals and
companies, higher fixed asset investment, and permission for municipal
governments to raise money by selling through the Finance Ministry 200 billion
yuan in bonds.
Wen said the country will act to expand consumer demand, seen as vitally
important as exports slump, with higher pay for public sector employees,
including 12 billion yuan to be spent on increased wages for 12 million
teachers.
The widely watched CSI 300 Index closed up 0.87% while Hong Kong's benchmark
Hang Seng Index slipped 0.97%. The city's China Enterprises Index, which
follows companies listed in Hong Kong and with stakes of at least 30% held by
mainland state or local governments, closed down 0.69%, reversing earlier
gains.
Wen said China's priority in the year ahead was to deal with the global
financial crisis and promote steady and rapid economic development. His speech,
similar to the United States presidential State of the Union address, details
the government's work over the past year and its plans for the coming year.
Wen acknowledged that 2009 could be "the most difficult year for China's
economic development since the beginning of the 21st century", with the global
financial crisis still spreading and yet to bottom out. He also said a trend
towards global deflation was becoming more obvious and that trade protectionism
is rising.
Listing key government tasks for the year, he said, "We must channel government
investment to areas where it best counteracts the effects of the global
financial crisis and to weak areas in economic and social development."
In his two-hour address, Wen said the government will "significantly increase"
government spending to expand domestic demand and adopt "a proactive fiscal
policy". No government investment will be made "in the regular processing
industries".
The 2009 budget deficit was set at a record 950 billion yuan, nine times the
2008 deficit of 111 billion yuan, as the government increases spending.
National spending is planned to increase 22% this year to 7.62 trillion yuan,
compared with 6.24 trillion yuan last year, when spending increased 25.4%, Wen
said.
Central government spending will more than double in 2009 to 908 billion yuan,
focusing on improving people's lives, he said. Cash will go to environmental
protection, technology innovation, infrastructure, low-income housing,
education, healthcare and reconstruction in area's hit by last spring's
earthquake in Sichuan province.
Social security spending will rise by 17.6% to 293 billion this year and
science and technology investment will climb 25.6%. Defense spending will be
increased 14.9% this year to raise salaries of the world's largest standing
army, the government said this week.
Local governments, facing slowing revenue growth and rising expenditures, will
be allowed to issue 200 billion yuan in bonds through the Ministry of Finance,
Wen said. According to Chinese media reports, the bond auctions to be organized
by the Finance Ministry will be the first of their kind since the 1997-98 Asian
financial crisis.
Tax incentives and fiscal measures will be used to support the export sector,
while the exchange rate will be kept "basically stable", Wen said. That may set
the government further at odds with the US, where lobbyists and some
legislators have long argued that the yuan should be allowed to appreciate
steeply against the US dollar.
To encourage investment by companies and spending by individuals, changes in
the value-added tax system will cut the corporate and personal tax burden by
about 500 billion yuan this year.
The government's concern with poorer areas of the country was highlighted by
its plans to increase spending in rural areas. As exports falter with reduced
spending in China's biggest markets such as the US and Europe, many migrant
workers are being laid off, forcing them to return home from the affluent
coastal regions to the rural hinterland.
This week, Politburo member Jia Qinglin urged leaders of the private sector "to
try their best to refrain from laying off any employees, cutting salaries or
withholding wages, so as to create a harmonious labor relationship".
Wen on Thursday said the central government plans to increase rural development
spending about 38% this year to a record high of 595.5 billion yuan. The
government will also fund 39% of an 850 billion yuan medical reform plan and
increase spending on rural education for primary and junior high school
students.
Wen, though failing to announce any new stimulus package, was confident that
the country could reach its 8% growth target.
"As long as we adopt the right policies and appropriate measures and implement
them effectively, we will be able to achieve this target," Wen said. It is the
fifth year in a row for the country to target an 8% expansion in the economy.
Standard Chartered chief China economist Stephen Green said earlier the
anticipated new stimulus could be worth as much as 4 trillion yuan.
The global economic downturn hit China hard late last year, with growth in the
country's gross domestic product (GDP) dropping to 6.8% in the fourth quarter,
dragging down GDP growth for all of 2008 to 9%, the lowest rate since 2001 and
ending five consecutive years of double-digit expansion.
To offset unemployment due to the global financial crisis, Wen pledged 42
billion yuan to create more than 9 million jobs in urban areas and try to keep
the registered urban unemployment rate under 4.6% and inflation as measured by
the consumer price index (CPI) at 4%.
As demand for exports has dropped, about 20 million migrant workers have lost
their jobs. The urban registered unemployment rate, which excludes migrant
workers, jumped in 2008 for the first time in five years to 4.2% as of the end
of December, according to the Ministry of Human Resources and Social Security.
With about 7.5 million college graduates to enter the job market this year, the
2009 unemployment target rate is the highest since 1980 although lower than
last year's actual rate of 5.9%.
China's exports fell 17.5% year-on-year to $90.45 billion in January. It was
the third consecutive drop following a 2.8% decline in December and a 2.2%
decrease in November. Even so, China's monthly trade surplus expanded 102% to
$39.1 billion in January.
Jing Ulrich, managing director and chairman of China Equities at JP Morgan,
referred in a note to Wen's announcements being "an unofficial second phase of
stimulus efforts". She said approval by the NPC of an 850 billion yuan
healthcare reform plan and local initiatives would support retail activity.
The NPC's discussions following Wen's speech will focus "on short-term measures
to preserve employment and on longer-term policies to rebalance China's economy
from a heavy reliance on investments and exports", she said.
The government's forecast of 4% inflation might indicate it is too complacent
about falling prices and deflation, Frank Gong, JP Morgan's chief China
economist, said in a note. He expected more interest rate cuts this year and an
easing of the reserve requirement imposed on banks. JPMorgan forecasts 2009
inflation of as low as 0.1%.
The People's Bank of China (central bank) has cut interest rates five times
since September for a cumulative cut of 216 basis points in the benchmark
one-year lending rate, which now stands at 5.3%. Gong expected two more cuts,
each of 27 basis points, or 0.27 percentage points, this year, one in the
second quarter and another in the third quarter.
Olivia Chung is a senior Asia Times Online reporter.
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