Top Chinese official warns on downturn

The downturn in the Chinese economy accelerated over the past month and could lead to high unemployment and social unrest, the country’s top economic planner warned on Thursday.

Zhang Ping, chairman of the National Development and Reform Commission, said the government needed to take “forceful” measures to limit the slowdown in the economy, which included Wednesday’s large cut in interest rates and a sharp increase in fiscal spending. The rate cut was the fourth since September.

“The global financial crisis has not bottomed out yet. The impact is spreading globally and deepening in China. Some domestic economic indicators point to an accelerated slowdown in November,” Mr Zhang said on Thursday at a rare news conference.

Mr Zhang’s warning about the potential for social unrest as a result of factory closures underlined the mounting concern in Beijing about the fallout from the global financial crisis.

“Excessive production cuts and closures of businesses will cause massive unemployment, which will lead to instability,” Mr Zhang said.

His comments came a day after the mayor of Shenzhen, China’s largest export centre, said factory closures had claimed 50,000 jobs in the city so far this year after 682 factories closed or stopped production.

The city was facing “grimmer challenges than in the Asian financial turmoil,” Xu Zongheng said.

Mr Zhang gave no fresh details about economic activity over the past month. Industrial production grew by 8.2 per cent in October, the lowest level in seven years, and sharp drops in construction investment, tax revenues and electricity demand have fuelled speculation that the economy might be cooling even more quickly.

Mr Zhang provided the first breakdown of how the money would be spent, indicating that nearly three-quarters of the Rmb4,000bn (£382bn, $586bn, €452bn) investment over two years would go on infrastructure projects.

He said that Rmb1,800bn would be spent on railways, roads and airports, with a further Rmb1,000bn on disaster reconstruction, especially in the region of Sichuan province, hit by an earthquake in May.

About Rmb370bn would be spent on rural development and Rmb40bn on health and education.

Mr Zhang said that the extra spending would add about 1 percentage point to economic growth next year, less than most private sector economists had forecast.

He added that there were no plans to allow local governments to issue bonds to pay for new investments.

Andy Rothman, an economist at CLSA in Shanghai, said that although there were still many details to be clarified about how the government would spend the extra funds, the main purpose of the fiscal announcements was to guide sentiment.

“There will be a lot more rhetoric about how confident the authorities are, which will be particularly aimed at getting the housing market going again,” he said.

The economy would continue to slow over the next few months, he said, but would start to stabilise in the second quarter of next year.

By Geoff Dyer in Beijing
Published: November 27 2008 16:48 | Last updated: November 27 2008 16:48

Source: The Financial Times

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