Is This China's 'New Deal'?

Government fears growing unemployment could lead to social unrest.

BEIJING, Nov. 11, 2008 -- Look to southern China to provide a stark illustration of how the global economic downturn and America's recession is playing out across the world.

The Pearl River Delta has been the manufacturing capital of the world, motherland of the "made in China" brand. But in the first nine months of this year, 1,300 companies in the region shut down, suspended business or moved their factories out of southern China.

Only 20 percent of foreign-invested firms in the region are seeing a profit, down from 90 percent when the boom was at its peak, according to provincial trade authorities.

Tens of thousands of factory workers are now out of work and social unrest is becoming a real threat with which the central government must contend. There have been several reports of workers protesting after their companies shut down. Local governments have stepped in and started paying the workers back wages.

Qin Wei is an 18-year-old migrant worker who was laid off from BEP in Shenzhen, a factory that produced home appliances for the American brand Cuisinart. It was his first job, one that he traveled more than 500 miles from his hometown to find. Now, he has no idea what to do. The company owes him $300 and he is having trouble finding another job as more and more factories close and low-skilled workers flood the market.

"I want to find another job. I have no money," Qin told ABC News. "I cannot even feed myself."

It's a story heard over and over in southern China.

Wu Xiu Feng is a mother of two who has spent the last 11 years making irons for a factory that just shut down. She and her husband are desperately looking for work and are worried about having enough money to feed their two children. Like most factory workers, she is a migrant worker.

"I can't even afford to go home," she told ABC News. "I feel miserable."

The central government is listening and trying to respond both to rising unemployment and pressure from abroad to take action. A stimulus package has been rolled out. An estimated $580 billion will be spent over the next two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from disasters, notably the May 12 earthquake in Sichuan that killed 70,000 and left millions homeless. Analysts have likened the plan to China's version of FDR's New Deal.

China's Growth Slowed Sharply This Year

Chinese Premier Wen Jiabao, according to state media, said the stimulus package was crucial to tiding over the difficulties and maintaining long-term economic growth momentum. Wen urged local governments to be "quick" and "effective" in carrying out these measures.

China's government also announced it would extend its value-added tax reform to all industries nationwide beginning in January, which would reduce the tax burden on companies by more than $17.6 billion. This is designed to give a boost to Chinese companies and increase domestic demand.

"It's a social stability issue," said Logan Wright, an economic analyst at Stone & McCarthy Research Associates. "They don't want large numbers of people rioting at factories…The government is holding on to growth at all costs."

China's growth slowed sharply this year, to 9 percent.

Wright cautions that within China's new plan, it is unclear how much of the $580 billion is new spending and how much had already been planned. "Chinese authorities are aware that the rest of the world is watching what they're doing. … The idea is to demonstrate that the government is prepared to stimulate the economy on a large scale."

The Shanghai Composite, the domestic stock market, reacted positively to the news, gaining 7 percent Monday, but losing 1.7 percent today. China's mainland stock market has a long distance to travel to get anywhere near recovery. It has lost 70 percent in the last year.

President Hu Jintao will join President Bush and other world leaders in Washington this weekend for the global economic summit. And China's new stimulus plan is something Beijing will point to as an example of active participation. The plan will become China's front line of defense against the economic slowdown, but it is unclear whether it will be enough to help turn around the global slowdown.