Leader says China will spend more to grow

BEIJING -- In a world with precious little good economic news, all eyes this week swung to China.

Investors were cautiously cheered by the first signs that a massive $585 billion stimulus program was spurring economic rejuvenation. A key purchasing managers index rose for the third-consecutive month. And there were hints that Premier Wen Jiabao might even announce a second stimulus package at this week's annual meeting of the National People's Congress, China's rubber-stamp legislature.

As it happened, Wen on Thursday disappointed hopes of a new round of pump-priming. But in a nationally televised address, the Chinese premier vowed to do whatever is needed for China to grow at an annual rate of 8% this year. "We will significantly increase government spending," he told the opening session of China's top legislature, the National People's Congress (NPC).

Western investment banks expect China's economy, which was growing at a nearly 12% annual rate in mid-2008, to struggle to hit Wen's goal. Growth slowed to an annual pace of 6.8% in the final three months of last year. But analysts say the government is far from running out of weapons to fight the global downturn.

"We know that there are projects amounting to $1.1 (trillion) to $1.5 trillion that officials can authorize whenever they feel it's time," says economist Stephen Green of Standard Chartered Bank in Shanghai. "But keeping stuff in the back pocket is a good idea, as it will be at least two years before exports recover."

The financial crisis has hit China's job-rich export processing sector hardest. Slowing U.S. and European economies mean fewer orders for Chinese makers of furniture, toys and clothing. "It grieves me too much to reveal our sales figures," says Yan Wufang, general manager of bra maker Shantou Yaofa in Guangdong province.

Government policies such as a 17% tax rebate "have been good for our business, but conditions remain very difficult. Some foreign clients placed orders but failed to pay up," says Yan, who has laid off dozens of workers in recent months.

"We hope more Americans will buy our underwear, but it's not enough to rely on American and Chinese efforts. We need a global economic recovery," he says.

Restaurateur Huang Geng, founder of a 200-outlet chain of midprice eateries, says that the initial stimulus plan already has been good for business.

"It encourages people to spend money. Expensive business dinners have shrunk in this economic climate, but affordable places like mine, under $10 per head, enjoy steady demand," says Huang, who plans to open a new restaurant in Beijing next month, creating 20 new jobs. "I am very confident about the future."

Beijing's one-party system offers clear advantages in dealing with this crisis, says Sherman Chan, an economist in the Sydney office of Moody's Economy.com. "Once the central government sets a target, they go for it immediately," she says.

Chan sees two early signs of success for China: a surge in bank lending and encouraging recent figures on the purchasing managers index (PMI). The February PMI, released Wednesday, reached a level of 49. That's just short of indicating manufacturing expansion and up sharply since reaching an all-time low of 38.8 in November.

At the NPC Thursday, where 3,000 handpicked delegates listened to Wen's two-hour speech, several noted quick results from Beijing 's emergency measures to speed growth.

"We are building more low-cost housing, and renovating many school classrooms," said Jiang Sixian, vice governor of Hainan, an island province off China 's southern coast. "Consumer confidence is good. We received more domestic tourists in January and February than we did last year, and their expenditure has also increased."

Tropical tourism is a remote concept for many hard-pressed Chinese, who save much of their incomes to compensate for the absence of government programs covering major expenses such as health care. The government plans to increase spending on health care and other programs this year.

But in southwest China's Youyang, laborer Luo Yiqiong waits to see if the government's promises will reach her 60-year-old mother, a farmer. "Central government policies are very good, but it's very hard to have them implemented at the grass roots," Lou complains.