China Targets Early Recovery with Stimulus, Consumer Spending

To people in China's southern export bases like Guangdong and Zhejiang provinces, the celebration of the Year of the Ox was tempered with bitterness as exports plunged and the economy, like many others in Asia, cooled to its slowest pace in years.

Many hoped that the Lunar New Year, which arrived a couple of weeks earlier than usual on Jan. 26, would bring an early economic recovery.

Analysts believe this is possible, because amid the gloom of falling exports in the south, China can benefit from resilient consumer spending, strong investment growth spurred by a massive stimulus package and an active government role in economic development.

PLUNGING EXPORTS, SLOWING GROWTH

In Guangdong, which has the largest economy among China's provinces, tens of thousands of export-oriented factories make everything from toys to clothes, telecom devices and cars. Many of these companies have never experienced such a tough year as 2008, when overseas demand virtually evaporated as the financial crisis hit real economies around the world.

Yao Zhongwo's Sunrise Houseware, which produces non-stick cookware, was one of the small companies whose export orders virtually dried up. In the second half of 2008, plummeting demand from the United States and Europe, Yao's major markets, forced him to suspend work on a new factory and lay off workers.

"I have been doing business over the last 12 years. But I have never seen any leaner year than 2008 with so many difficulties," he told Xinhua.

The impact of the global financial crisis is clear and widespread. Many Guangdong exporters couldn't meet their 2008 goals. In November and December, the province's exports fell 5.1 percent and 6.8 percent respectively year-on-year. The last monthly drop for Guangdong's exports was in March 2002.

Last year, Guangdong's exports reached 404 billion U.S. dollars, up 9.4 percent from a year earlier. The growth rate, however, was 12.8 percentage points less than in 2007. It was also below the 10percent target the province set in early 2008.

Liang Yaowen, director-general of the Guangdong Foreign Trade and Economic Cooperation Department, acknowledged that the financial crisis was having a severe impact on Guangdong. Exports account for about 75 percent of Guangdong's economy, vs. a national level of 32.6 percent.

"Last year, Guangdong received 30 percent to 40 percent fewer export orders than the previous year," he said. That decline indicates an even worse year for Guangdong's exports in 2009, given the timing difference between orders and deliveries, and provincial officials like Liang said Guangdong's exports faced an "unprecedented grim" situation this year.

Liang forecast Guangdong's exports might grow as little as 0.1 percent in 2009.

Since Guangdong's exports accounted for more than one fourth of the country's total of 1.43 trillion U.S. dollars last year, the provincial decline had a significant impact on national figures.

In November, China's exports fell 2.4 percent year-on-year, the first monthly decline since June 2001. In December, the decline was 2.8 percent.

The declines took some of the sizzle out of economic growth since exports, along with investment and consumption, was one of the three major factors driving the economy.

China doesn't provide an exact breakdown of those three components of gross domestic product (GDP), but domestic and foreign economists have estimated that foreign trade normally accounts for about 40 percent and investment for about 35 percent.

FIGURES GET UGLY

In the fourth quarter of 2008, economic growth slid to 6.8 percent year-on-year, sharply down from 9 percent in the previous quarter, the National Bureau of Statistics (NBS) has reported.

That was the slowest pace since the fourth quarter of 1999, when the economy grew only 6.1 percent as a result of the Asian financial crisis.

On a full-year basis, GDP grew 9 percent year-on-year, the lowest since 2001, when an annual rate of 8.3 percent was recorded.

Breaking down growth by activity, Ma said, the 9 percent included 4.2 percentage points from investment, 4 points from consumption and 0.8 points from exports. In 2007, exports contributed more than 3 percentage points of the annual 13 percent GDP growth.

Tang Min, deputy secretary of the China Development Research Foundation, a think tank linked to the State Council (cabinet), said the financial crisis had struck hard at exports and export-related industries, which led to some ugly figures.

"As a major economy, China relies too much on exports, which entails big risks," said Tang.

Ding Yuanzhu, a Beijing-based economic scholar with the National School of Administration, a training facility for civil servants, echoed Tang's assessment. Even though China has become the world's third-largest economy, it has weaknesses, such as a heavy reliance on trade and weak domestic demand. The global economic crisis underscored those weaknesses, he said.

In mid-January, the NBS revised China's 2007 GDP to 25.73 trillion yuan (3.76 trillion U.S. dollars), which enabled China to overtake Germany as the world's third-largest economy, after the United States and Japan.
INCOMES, RETAIL SALES ARE SILVER LINING

Ding and Tang described the Chinese economic picture as grim, but they also saw signs of optimism, because other major economic indicators such as retail sales, urban incomes and investment continued to grow strongly.

"It is good to have robust consumption, with retail sales growing markedly. Moreover, net income of urban residents didn't fall," said Tang.

According to the NBS, retail sales jumped 21.6 percent last year to 10.8 trillion yuan, which was 4.8 percentage points higher than a year earlier. Urban disposable incomes averaged 15,781 yuan in 2008, up 14.5 percent year-on-year.

The NBS' Ma said real retail sales growth was 17.4 percent in December, or 0.8 percentage points more than in November.

He cited the December sales data as an indication of positive economic change. Other factors included acceleration in industrial output and a strong rebound in the money supply.

"Domestic sales growth remained relatively fast and consumption in urban and rural areas remained robust," he said, adding that strong consumption growth was expected to continue this year and help offset the impact of any export slowdown.

Another area of growth would be fixed-asset investment, which rose 25.5 percent to 17.23 trillion yuan in 2008. The growth rate was 0.7 percentage points higher than the previous year.

Yuan Gangming, a senior economist at the Underdeveloped Economic Center of the Chinese Academy of Social Sciences (CASS), a major government think tank, saw the 6.8-percent rate as a strong sign that the economy had touched bottom.

"Since many factories reduced production during the Lunar New Year holidays, economic growth in the first and second quarter this year is likely to bounce around the bottom, but we probably won't see uglier figures hereafter," he told Xinhua.

"Now that the monetary and fiscal policies have been turned to positive and a series of measures have been announced, an economic rebound is very likely," he said.

QUICK TURNAROUND

In September, the government made a macroeconomic U-turn as it shifted from fighting overheating to actively stimulating the economy. The central government announced a series of measures to spur investment and expand domestic demand. These included a 4-trillion-yuan stimulus package, a plan to expand rural ownership of home appliances and the issue of 3G telecoms licenses.

Additionally, the People's Bank of China (central bank) has cut interest rates five times since Sept. 15.

Unlike some emerging market economies, China is in a relatively strong position in terms of foreign debts. As of Sept. 30, outstanding foreign debt was about 442 billion U.S. dollars, up about 18 percent from the end of 2007. Short-term debt accounted for about two-thirds of the total. At end-September, foreign reserves totaled about 1.9 trillion U.S. dollars.

China's central government finances also provide it with some degree of flexibility: last year's budget deficit was about 111 billion yuan, but that was less than 1 percent of GDP.
Another significant factor, Yuan said, was that many inland and northern regions were less affected by the financial crisis and its impact on exports.

In comparison with more export-oriented provinces such as Guangdong and Zhejiang, where many factories cut back or shut down, inland and northern Chinese regions had been less affected. "Regions or companies with more connection with domestic demand suffered less impact," he said.

NBS' Ma said he was confident of the economy's prospects partly because robust demand in less-developed central and western regions would continue to propel national growth.

These less-affected regions were seeing more development opportunities in the past two months as the central government acted to stimulate the economy.

Party chief Zhao Shihong of Langfang in north China's Hebei Province did not think the financial crisis had exerted a significant impact on the city, which is located between Beijing and Tianjin. Instead, he said he expected the response to the crisis would mean opportunities for the city.

Langfang won big projects valued at more than 10 billion yuan from the country's stimulus plan, including construction of two light rail lines. "It would have been very difficult to win [such] investment in the past," he told Xinhua.

Zhao forecast the city's economy would grow up to 12 percent this year despite the financial crisis.

EARLY RECOVERY DESPITE DIFFICULTIES

Premier Wen Jiabao, in a tour of eastern China's industrial Jiangsu Province last month, gave his assessment of the situation.

"Measures taken by the central government to expand domestic demand and maintain growth have begun to take effect in some regions. Sales at some companies started to rebound, stockpiles decreased and electricity consumption increased. Some economic indicators were showing signs of recovery," he said.

Wen has acknowledged that this year would be the most difficult so far in the new millennium for the economy, but he also said China was likely to enjoy the earliest recovery among the world's major economies and achieve 8 percent growth this year.

More recently, in an interview with the Financial Times published over the weekend, Wen said China might take other "new, timely and decisive" stimulus measures.

According to Tang Min, China was likely to announce more measures, including industry-specific support plans, to support growth and the economy was expected to rebound in the second or third quarter.

THREE ADVANTAGES

Tang said China had three advantages in achieving an early recovery. First, the financial system was somewhat insulated from global turmoil; second, the economy had become more flexible after years of continuous reform and third, the government had a strong role in driving economic development.

Since the start of the global crisis, "the Chinese government was one of the fastest to introduce the most ambitious economic stimulus plan," said Tang. He added that he was confident of China's ability to "maintain eight," which is shorthand for the goal of achieving 8 percent GDP growth.

Most Chinese officials and experts believe that the country has to keep the economy growing at least 8 percent to create sufficient jobs for the country's labor force and maintain social stability.

All 32 provinces, autonomous regions and municipalities on the mainland have set annual growth targets for 2009 of at least 8 percent.

Southwest China's Guizhou and northwest China's Shanxi provinces have forecast the slowest rates, of 8 percent. Hebei, Guangdong, Beijing and Shanghai aimed for 9 percent growth, while Shaanxi and Inner Mongolia in northern China targeted the fastest growth rate at 13 percent.

These forecasts differ because they reflect different bases in 2008. For example, last year, Shaanxi and Inner Mongolia were among the fastest-growing economies with GDP rising by 15 percent and 17.5 percent year-on-year, respectively.