Beijing to spend its way out of crisis

PUBLISHED : Tuesday, 21 October, 2008, 12:00am
UPDATED : Tuesday, 21 October, 2008, 12:00am

Interest rate cuts, tax rebates and higher spending to spark growth

The central government is preparing to cut interest rates and boost infrastructure spending and tax rebates to exporters in an attempt to push up slowing mainland economic growth.

'Concrete fiscal, credit and trade measures will be issued soon,' said Li Xiaochao, a spokesman for the National Bureau of Statistics. 'This reflects the State Council's intentions to support agriculture and small and medium-sized enterprises, help exporters, increase investment and bolster housing demand.'

Economists at major foreign banks said the measures, part of an aggressive stimulus policy package, were likely to include:

Additional easing of rates and reserve ratio requirements for commercial banks. This could include three or four rate cuts of more than 27 basis points from the benchmark one-year lending and deposit rates by the end of next year, and one or two reserve ratio cuts of 50 basis points each.

Raising or scrapping bank lending quotas, in part to free up financial support for infrastructure projects and smaller enterprises.

Slower appreciation of the yuan against the US dollar, reflecting both the stronger greenback and slower export growth from the mainland.

Increasing rate of value added tax rebates for exporters in labour-intensive industries such as clothing and textiles and high-value-added industries such as machine-tool production.

Reduced fees and VAT rate for housing transactions and easing of mortgage rules on second properties.

Price rises for electricity, petrol and natural gas to ease pressure on power companies and oil and gas refiners.

Further policy support for the dairy industry, which has been battered by the tainted milk powder scandal.

Increasing infrastructure spending by more than 300 billion yuan (HK$341 billion), or 1 per cent of GDP next year. The central government's budget for infrastructure construction financed by treasury bonds was 30 billion yuan this year.

JP Morgan said a more aggressive fiscal policy had to be designed to stimulate and support domestic demand. Policies such as increasing export tax rebates and increasing loans to SMEs would not solve 'the end-demand problem'.

If slumping demand caused a company cash flow problems, giving that firm more loans or tax rebates would not help. 'We believe that weakening end demand is the root problem and policies to stimulate infrastructure investment, consumption - by tax cuts - and housing and stock markets,' it said.

Morgan Stanley said it expected 'a comprehensive economic stimulus package' for next year to be announced at the conclusion of the annual Central Economic Work Conference that is likely to take place in early December.

It forecasts further significant drops in GDP growth in the fourth quarter this year and the first quarter of next year.

'A bottom could be reached then, and growth could start to stage a tentative recovery by the middle of 2009,' it said.