CHINA IS facing its worst financial crisis in a century as the world economy goes into a tailspin, Chinese premier Wen Jiabao said in a speech at the country’s annual parliament yesterday, which focused on the economy as the primary issue facing the world’s most populous country.
Despite the strong impact of the slowdown, Mr Wen’s speech had bullish elements, forecasting robust growth of 8 per cent, while recognising that his country faced major challenges, not least of which is keeping a lid on social unrest. “In projecting the economic growth target of about 8 per cent, we have taken into consideration both our need and ability to sustain growth,” he told the comrades gathered in the Great Hall of the People.
To see the number of red flags and military uniforms, and the unanimous votes by the 3,000 delegates and huge rounds of applause, one could be forgiven for thinking that communism, not capitalism was the true winner of the cold war – the National People’s Congress is a truly socialist event. With Chinese characteristics of course. Premier Wen said central government would boost spending on healthcare and other social welfare programmes, and take further steps to offset the rising unemployment resulting from the collapse of the export market because of the global financial crisis.
“We are facing unprecedented difficulties and challenges,” he said. China’s double-digit growth is ancient history now, the export market which fuelled that growth has collapsed, and 20-million migrant workers are going back to their homes in the countryside, posing a threat of social unrest that could destabilise the Communist Party’s single-party rule.
His optimism was based on recent indications that the Chinese economy might be turning around – purchasing managers are more upbeat, power station output is increasing and there are signs that sentiment is picking up slightly. The government also points to rising bank lending and power consumption as signs that its slump might already be bottoming out.
The core of his stimulus plan is aimed at reducing reliance on exports, which plunged by 17.5 per cent in January, by pumping money into the economy through higher spending on public works to boost domestic consumption.
Another reason why Mr Wen can be cautiously upbeat is that China has such a high savings rate. China has trillions of dollars in foreign currency reserves and since the crisis began, the West has looked to China to help bail it out after its years of running up bad credit. China responded with the biggest fiscal stimulus programme the world has ever seen – four trillion yuan worth of infrastructure investment that could ultimately stop the rest of the world sliding even deeper into the mire.
The speech contained measures to boost domestic demand and stimulate consumer spending, including subsidies for farmers to buy fridges and cars. He said the politically sensitive exchange rate for China’s currency, the yuan, will be kept “basically stable.” Exporters want the yuan devalued to make their goods less expensive abroad.
At a time when the world economy is contracting, 8 per cent growth is a remarkable figure. Look at the United States: Goldman Sachs has forecast the US economy could decline by 8 per cent in the current quarter – the biggest drop in half a century – with another 3 per cent drop in the June quarter.
Private sector economists say China will have a hard time recovering until the EU, China’s biggest export market, and the US start to pick up, which might not happen until next year.
To fund a 25 per cent increase in government spending, China has increased its budget deficit. However, Mr Wen forecast the budget deficit this year would be about 3 per cent, compared to 12 per cent in the US. He also said China was ready to enter into talks with Taiwan that could bring an end to 60 years of hostility.