November 27, 2008 / 7:26 AM / 9 years ago

Faltering Chinese growth may fan unrest-top planner

BEIJING (Reuters) - The downturn in China’s economy is gathering force as the global financial crisis spreads, foreshadowing rising unemployment and social unrest, the country’s top planner said on Thursday.

Alarm bells are ringing in Beijing over the abrupt cooling, which prompted the central bank on Wednesday to make the biggest cut in interest rates since the 1997 Asian financial crisis.

“Owing to dramatic changes in the international economic and financial environment, the Chinese economy currently faces growing downside pressure,” Zhang Ping, chairman of the National Development and Reform Commission, told a news conference.

The State Information Centre, a government think-tank, forecast on Thursday that annual gross domestic product growth would slow to 8.0 percent this quarter from 9.0 percent in the third quarter under the impact of weakness in exports and a slump in the property market. [nSHA1723]

“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,” Zhang said.

In the latest official admission of strains in the social fabric, Zhang said China would face serious jobless problems next year.

“Excessive bankruptcies and production cuts will lead to massive unemployment and stir social unrest,” Zhang warned.

With factory closures spreading, especially in the export sector, laid-off workers protested this week against low compensation in three Chinese provinces.

On Tuesday, an angry crowd of 500 workers overturned police cars in front of a major toy company that was firing workers in the southern export centre of Dongguan near Hong Kong.

Zhang was speaking a day after the People’s Bank of China cut banks’ benchmark lending rates by 1.08 percentage points.

The aggressive rate cut -- four times the central bank’s usual increment of 0.27 percentage point -- was in line with the need for strong steps to tackle the crisis, Zhang said.

“We must adopt more forceful and effective measures to combat the excessive economic slowdown, and the interest rate cut is part of the effort,” he said.

Worries about the outlook for growth and profits caused Shanghai stocks to give up most of the early gains sparked by the rate cut. The market's main index .SSEC, which rose 6.57 percent at one stage, ended a provisional 1 percent higher.

“A surprise easing of this massive size suggests the economy is in worse shape than previously thought,” said a trader at a major Chinese bank in Shanghai.

FISCAL PACKAGE

The cut in borrowing costs will reinforce a 4 trillion yuan ($586 billion) fiscal package unveiled on Nov. 9 aimed at boosting domestic demand over the next two years.

According to the NDRC’s estimates, the stimulus will boost growth by about 1 percentage point each year, Zhang said.

Breaking down the package, he said the money would be spent in six sectors:

-- 1.8 trillion yuan on railways, roads and airports;

-- 1.0 trillion yuan for reconstruction after May’s devastating earthquake centred in Sichuan;

-- 370 billion yuan for improving rural living standards and infrastructure;

-- 350 billion yuan for environmental protection;

-- 280 billion yuan for housing;

-- 160 billion yuan for innovation;

-- 40 billion yuan on healthcare and education.

The central government is financing nearly 30 percent of the headline figure itself and hopes to drum up the remainder from local authorities, state-owned banks and businesses.

Zhang played down media reports that Beijing intended to engineer a big boost in personal incomes, perhaps by cutting income taxes or increasing minimum wages.

But he said the government would introduce further measures to create jobs and increase spending power, for example through subsidies targeted at low-income households.

“We will continue to consider further measures to boost consumption according to market conditions and the economic situation,” Zhang said.

Reporting by Zhou Xin; Additional reporting by Karen Yeung in Shanghai; Writing by Alan Wheatley; Editing by Neil Fullick

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