China's leaders vow to keep stimulus, easy credit

[December 07, 2009]  SHANGHAI (AP) -- China's leaders vowed Monday to keep economic stimulus and easy credit policies in place, while also improving the quality of the country's often chaotic economic growth.

An annual economic strategy meeting, presided over by President Hu Jintao and Premier Wen Jiabao, ended as expected with calls to ensure China's recovery from the global crisis remains stable, the official Xinhua News Agency said in dispatches posted on the government's main Web site.

Officials attending the three-day Central Economic Work Conference in Beijing agreed the global slowdown had added to the urgency for China to adjust its model of economic growth, which many economists say is excessively dominated by state-led industries at the expense of consumer demand.

China's economy is forecast to grow 8.3 percent this year, according to a government "bluebook" report on the economy issued Monday, after dipping to a low of 6.1 percent in the first quarter and since recovering to 8.9 percent in July-September.

But leaders are wary of pulling back from stimulus policies put in place late last year, given the weakness of key export markets in the U.S. and Europe, where unemployment remains high despite signs the worst may be past.

To counter the slump in exports, Beijing announced a 4 trillion yuan ($586 billion) stimulus package and urged state-controlled banks to lend lavishly to support a slew of public works projects. Monday's pronouncement also included calls to recover momentum in the export sector, while also boosting imports.

Now, however, Beijing's emphasis is shifting to promoting consumer spending and private investment -- drivers of domestic demand that are seen as crucial for future growth.

China's leaders have long acknowledged that the country must make those changes to help counter potentially destabilizing long-term problems -- environmental devastation, widening gaps between rich and poor and vulnerability to volatile global market trends.

While Chinese cities have prospered during the past three decades of rapid growth, incomes and services for the country's rural majority have lagged behind. To help close the huge gap between urban and rural living standards, Beijing's planners endorsed stepping up urbanization and gradually loosening residency restrictions on migration to provincial cities.

The impact of policies geared toward encouraging more consumer spending is already evident: as of November, tax cuts and subsidies helped boost car sales this year to over 12 million, Xinhua reported citing industry figures.

Retail sales have also remained buoyant, suggesting efforts to boost domestic demand are beginning to pay off.

But economists say consumer spending accounts for less than half of China's economic activity -- well below the levels in many other major economies.

Instead, state-led industries were the main beneficiaries of the stimulus program, as local manufacturers ramped up output of steel, cement and other raw materials to supply massive construction programs.

In Chongqing, construction of projects that will raise the city's annual production capacity for cement to 91 million tons from the current 12 million tons is either underway or approved, the state-run newspaper China Business News recently reported -- roughly 3 tons of cement for each person living there.

China's top level planners have struggled to control such trends at the local level, warning banks against lending to such projects, which are unlikely to turn a profit but cause massive waste and damage to the environment.

Often, though, the vested interests of local powerbrokers prevail.

The rapid credit expansion has worsened risks in China's banking sector, the Basel, Switzerland-based Bank for International Settlements warned in a quarterly report issued Sunday.

Chinese banks issued some 8.95 trillion yuan ($1.3 trillion) in new loans in January-October, up from a total of 4.2 trillion yuan the year before, future tightening of monetary policies might leave some projects short of funds before they are completed, leading to a buildup of bad loans, it said.

Meanwhile, inflows of outside capital into the world's fastest growing major economy are adding to inflationary pressures, especially in real estate and stock markets, the BIS report warned.

"Chinese policymakers may face significant constraints on their monetary and credit policy in the years to come," it said.

[Associated Press; By ELAINE KURTENBACH]

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