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Financial storm brings on China's 'New Deal'

By Zheng Lifei (China Daily)
Updated: 2008-11-17 09:33

Exports grew 19.2 percent in October, down from 21.5 percent recorded in Sept and sharply lower than the recent peak of 26.9 percent in July.

And experts say the export growth will drop further in the coming months.

"The external environment for the Chinese economy has undoubtedly become more challenging than we originally envisaged," Morgan Stanley said in a note last week when downgrading China's GDP growth forecasts for 2009 to 7.5 percent from 8.2 percent, citing the smaller contribution of net exports (due to slower export expansion) to growth and weaker investment in the real estate sector.

"It may take much longer for China's exports juggernaut to pick up the pace again this time (than the country did in the aftermath of Asia financial turmoil)," Shen says.

Under such circumstances, Shen says it becomes natural and imperative for China to turn its eyes on domestic consumption.

"China pulled through the Asian financial crisis by increasing investment and exports, but this time it cannot pin its hope on exports so it has to ignite the engine of consumption," says Shen, who predicts China's GDP would grow at least 8.5 percent.

He says the government should also pay attention to raise the earnings of middle-income groups by lifting the individual income tax threshold.

The central government should also provide financial assistance to workers, especially the migrant ones, who lose their jobs in the economic slowdown, he adds.

Shen also suggests the country needs to further open its services sector such as telecom and aviation to attract investment and spur consumption.

And some economists say the massive investment plan this time may not be as effective as it did in the wake of Asian financial crisis to attract social investment on board.

The central government's investment in social welfare programs or rural infrastructure projects would not generate as much excitement for private investors as it does in urban infrastructure or transportation projects, Stephen Green, chief China economist at Standard Chartered Bank in Shanghai, tells China Business Weekly.

"It will be hard for those projects to attract private sector investors to be involved as returns on these investments will not be appealing enough," Green says.

"But it (investments in social welfare program) is a long-term shot which helps spur consumption," he says.

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