Asia Thrives On China’s Rising Affluence – Boomtown In Tough Times

Beijing is planning tax cuts and a public-works spending spree

China’s leaders are planning tax cuts and a public-works spending spree to make sure their economy’s growth isn’t doused along with the Olympic flame.

Ten of 11 summer Olympics host nations analysed by Morgan Stanley economist Stephen Jen saw growth and investment slump in the year following the Games; the only exception in his study, which stretches back to 1956, was the US in 1996.

Government officials in China, whose expansion was already slowing before the Beijing Games ended last month, are determined to avoid what Mr Jen calls the ‘Olympic Curse’. That would provide a welcome boost for some of China’s neighbours, including South Korea and Taiwan, as well as for commodity producers from Australia to Brazil whose economies are threatened by faltering demand from the US, Japan and Europe.

‘The Chinese authorities will do whatever they can to avoid a sharp slowdown,’ said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about US$108 billion. ‘China’s economy will be a key pillar of strength for Asia.’

China has already eased lending restrictions and halted an appreciation of the yuan that was starting to pinch exports. Now, after four straight quarters of decelerating gross domestic product growth, the
government is considering a fiscal stimulus of as much as 400 billion yuan (S$83.4 billion), according to economists and reports in domestic news media.

A plan awaiting approval from the State Council and the National People’s Congress includes 220 billion yuan of spending and 150 billion yuan of tax cuts, the Beijing-based Economic Observer newspaper reported last week.

China has tripled railway spending this year to 300 billion yuan. The current five-year plan, which runs through 2010, calls for investing almost 4.8 trillion yuan on power stations, waterways, roads and other infrastructure projects – more than the combined output of Taiwan, Thailand and Vietnam. Reconstruction after May’s Sichuan earthquake could cost another one trillion yuan, the government says.

‘As the Chinese economy moderates, official priorities are tilting towards maintaining growth and employment,’ said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co in Hong Kong. ‘China’s infrastructure spending could even accelerate after the Games.’

China might go beyond fiscal stimulus. The People’s Bank of China said on Aug 15 that it would ‘fine-tune’ monetary policy to cushion the economy as overseas demand weakens.

Frank Gong, head of China research at JPMorgan, expects the central bank to reduce the portion of deposits banks are required to hold as reserves by 2.5 percentage points, to 15 per cent, by next year.

China’s inflation rate ‘is coming down, so they have got potential to take their foot off the brake and ease up on monetary policy’, AMP’s Mr Oliver said. The rate peaked at 8.7 per cent in February and was 6.3 per cent in July.

China’s growth slowed to a 10.1 per cent annual rate in the second quarter after a recent high of 12.6 per cent in the second quarter of 2007.

Some economists say that China’s expansion – still the fastest among the world’s 20 biggest economies – remains strong enough to maintain its momentum without new spending or monetary easing. ‘But it’s an uncertain world situation, so a month or two from now, those plans may
look very smart,’ said David Dollar, the World Bank’s director for China.

About 20,000 Hong Kong-owned businesses will close or relocate from China’s nearby Guangdong province by the end of this year, in part because of slowing export demand, according to the Hong Kong Small and Medium Enterprises Association.

In a country where the number of new job-seekers each year exceeds the number of jobs created by 20 million, a decline in economic growth to even 8 per cent would be tantamount to a recession, said Tao Dong, chief Asia economist with Credit Suisse AG in Hong Kong. Anything ‘below 9 per cent would make the authorities quite nervous’, he said.

That figure is significant for China’s neighbours as well. For every one percentage point that China increases its growth rate, the rest of Asia will be boosted by half that, said Huang Yiping, chief Asia
economist at Citigroup Inc in Hong Kong.

Among countries with the most at stake are Taiwan, which shipped almost 36 per cent of its total exports to China last year; South Korea, which sent 25 per cent; and Japan, which shipped 19 per cent, according to UBS AG.

Japan, whose economy shrank at an annual rate of 2.4 per cent last quarter, would be even worse off without strong demand from China, which replaced the US as Japan’s biggest customer in July.

China has ample funds to pay for pro-growth policies, with outstanding debt of only 15.7 per cent of GDP, compared with 75 per cent in India, a budget surplus and the world’s largest currency reserves, at US$1.8 trillion. — Bloomberg