China pumps $586 billion to bolster economy

China, the world's fourth largest economy,  with the second largest foreign exchange reserves of over $1 trillion, announced yesterday a massive $586 billion stimulus package to boost its economy and stimulate growth to halt the global financial that has engilfed the US, Europe and Japan, at its door.

The $586-billion package, or over half-trillion, will be used over a period of two years and focus on 10 areas of economic and social development including extra infusion of money in low-cost housing allover the country, spending on rural infrastructure, increased spending on roads, railways and modernising airports as well as spending on education, health, environmental protection, technical innovation and mergers and acquisitions.

As it plans to adopt a ''pro-active fiscal policy'' and follow a ''moderately loose'' economic policy, it will remove credit limits for commercial banks to boost more lending to priority projects and rural development.

It also announced that it will reform the value added tax system that  would relieve medium-size businesses by cutting around $17.5 billion in taxes.

It will also speed up rebuilding disaster-hit areas of Sichuan province agter the huge earthquake this May,  which killed nearly 70,000 people and rendered millions homeless. The $2.93 billion earmarked for disaster relief next year will be now spent in the fourth quarter of this year itself.

China's speed of growth, which had surprised the world, is now equally surprised at the rate at which the economic juggernaut is showing signs of slowing down with a sharp decline in foreign investment, lower demand for exports of Chinese goods, a growth rate that has decelerated for five consecutive quarters, rise in unemployment and decline in property sales, affecting steel, cement and glass companies.

Prime Minister Wen Jiabao had said that this year would be the worst in recent years for the country's economic development as it anticipates the worst growth in more than a decade, with the economy expected to grow only by 5.8 per cent in the fourth quarter this year, compared to 11 per cent in 2007.

Analysts fear that a sharp decline in its economy is already showing, with a weak investment climate and could harm some of its biggest banks, which have funded massively during the boom time.

Last week, the Chinese government announced that the Central Huijin Investment Co, the nation's sovereign wealth fund, will inject $19 billion into Agricultural Bank of China after the bank reported 817.97 billion yuan in non-performing loans at the end of 2007, lent at the behest of the government. This injection was part of the country's plan to restructure its banking industry, by making it into a wholly commercial enterprise which has cost them nearly $500 billion so far. (See: Agricultural Bank of China receives $19-billion infusion)

China's largest foreign exchange lender, Bank of China, reported its slowest growth in two years with profits hit by credit-market losses.

Consumer confidence, which has been hammered down globally because of the slowdown, credit squeeze and a looming recession, is also on the decline in China with consumers spending less and less on goods thereby forcing many factories in southern China to shut down and putting thousands of rural migrant labourers out of work.

Evidence is mounting that an estimated 130 million rural migrant workers who have taken up jobs in Chinese cities as construction workers, factory workers and street cleaners in the boom time are facing bleak prospects.(See: China feels the pangs as the world slows down)

The impact is being felt more in cities like Dongguan, an export hub near Hong Kong, where thousands of workers remain unpaid or have lost their jobs as the toy factories battle the downturn overseas. The local government had to intervene and give $3.5 million to the employees of Smart Union, which sold toys to Mattel, Disney and Hasbro, where 7,000 workers went on strike after losing their jobs due to the closure of the company.

Export orders for the upcoming Christmas season have fallen drastically by 20 per cent as big retailers in the US, UK and Europe report of a dramatic slump in sales. People in the US are not even ready to window shop and the few who enter malls just wander aimlessly although retailers are trying to lure customers with huge discounts generally reserved for the post-Christmas season.

Southern China, which had boomed due to the thriving manufacturing industry churning out electronics, clothing, toys and furniture and exported to the US, saw the worst decline as the global slowdown saw export orders plummeting and rising raw material and labor costs increasing.

According to government and industry estimates, more than 68, 000 small companies nationwide collapsed in the first half of 2008 and about 2.5 million people could lose their jobs in the Pearl River Delta region by the end of the year.

There are reports of many labour protests involving thousands of workers at major export companies, which include several publicly-listed companies last month.

Many economists have been proved wrong when they predicted that the current economic crisis would have a negligible effect on China, but with figures released by the Chinese government, shows that nearly all sectors of the economy is slowing and credit is being squeezed, for a country that is used to seeing zooming growth.

Since the 1980s, the Chinese government's focus was on developing an economy, which is export-driven and abetted it with an artificially undervalued currency. It encouraged foreign direct investment and huge infrastructure projects were undertaken as its trade surplus grew manifold and cities started coming up from nowhere in the hinterlands.

With double-digit GDP growth, foreign currency reserves of over $1 trillion, and ever increasing capital inflows, the Chinese economy zoomed and saw the new economic policies bearing fruit.

But now with the economy slowing down, social unrest has sprung up with rising inflation, overcapacity in the manufacturing sector and banks lending withut restraint  at the behest of the communist party.

China's leaders have made a series of moves to try to stabilise the economy with interest rates being cut three times in six weeks, new export-tax rebates, reduced costs for home buyers amidstears of a growth rate below 8 per cent,  leading to social unrest as jobs will be hard to come by in a rapidly urbanising country.

China's auto sales have plummeted and airlines have posted losses with Air China, the country's biggest international carrier, posting its first loss in seven quarters because of declining passengers and bets on fuel prices going awry.

China's stock markets have also taken a beating since their rise in 2006 and 2007. Share prices in Hong Kong are down about 50 per cent, and the Shanghai composite index has fallen 67 per cent this year, wiping out nearly all the gains the two had made in the previous two years.