China to continue stimulus programme

China will maintain its current macroeconomic policy stance aimed at bolstering domestic spending as the nation continues to experience fallout from the global recession, Premier Wen Jiabao said.

The effect of some of China’s stimulus policies will weaken over time, and the economy is still under pressure from declining demand for exports, Wen said in a statement on the central government’s Web site today.

China’s 4 trillion yuan ($586 billion) stimulus plan, which is funding the construction of roads, railways and airports, coupled with record lending helped the economy recover in the second quarter from the slowest growth rate in almost a decade. Government spending and the credit boom have countered a collapse in trade and aided global businesses from Semiconductor Manufacturing International Corp. to General Motors Co.

“The reason that we are sticking to the proactive fiscal policy and moderately loose monetary policy is because we are facing many difficulties and challenges,” Wen said. The comments were made during a three-day trip to east China’s Jiangsu province that ends today.

The world’s third-biggest economy expanded 7.9 percent in the second quarter from a year earlier, accelerating from a 6.1 percent pace in the first three months of 2009. In contrast, exports fell for an eighth month in June as the global recession cut demand, highlighting the economy’s dependence on stimulus spending to revive growth.

Official View

Today’s statement by Wen follows comments by three economic officials at a joint press conference two days ago, and may help to ease concern that China could remove stimulus efforts adopted last year amid a rebound in stock and property prices and a surge in lending. The Shanghai Composite Index of shares has climbed 79 percent this year.

Zhu Zhixin, vice chairman of the National Development and Reform Commission, said domestic demand in China is still weak and consumption is dependent on government stimulus. The People’s Bank of China doesn’t see any inflationary pressure in the economy and assets prices are not a factor taken into consideration when setting policies, deputy governor Su Ning said at the same briefing.

“The main message is the government will keep the policy stance loose, at least for now,” Goldman Sachs Group Inc. economists Yu Song and Helen Qiao wrote in a report dated Aug. 7.

“This should clear the recent confusions in the market about the government’s policy stance and preclude the possibilities of hikes to interest rates, reserve requirement ratios in the near term,” they wrote.

China’s central bank has kept interest rates and reserve requirements for banks unchanged this year after cutting them in the final four months of last year to counter the effects of the global credit crisis. The People’s Bank of China, in an Aug. 5 statement, reiterated its pledge to keep the yuan stable at a “reasonable and balanced” level.

The central bank scrapped quotas limiting lending in November 2008 to support the government’s stimulus package.

Source: Bloomberg

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