June 17, 2009

Beijing’s stimulus spending plan is boosting economic growth

BEIJING

China’s investment surged in May as the government poured money into its economic stimulus, helping to offset an unexpectedly sharp drop in trade, and economists said the world’s third-largest economy was improving.

Spending on factories and other fixed assets soared 32.9 per cent in the first five months of the year, the National Bureau of Statistics said. Merrill Lynch said that translated into growth in May of up to 38 per cent.

“Domestic activity has picked up, thanks to the government stimulus spending,” said economist David Cohen of Action Economics in Singapore.

May exports fell by a record 26.4 per cent from the same month of 2008, while imports contracted by 25.2 per cent, the customs agency said. That exceeded most economists’ forecasts.

Exports will not recover until key U.S. and European markets rebound, said economist Zuo Xiaolei of Galaxy Securities in Beijing. She said weak global demand for China’s goods will hurt its appetite for imports, a big share of which are raw materials and components used by export industries.

“For a fundamental improvement, we have to look to the international market,” Zuo said.

Despite the fall in imports, analysts said China’s demand for oil, iron ore and other foreign raw materials is rising as Beijing pumps money into the economy through its four-trillion-yuan (US$586 billion) stimulus.

“The Chinese economy for sure is improving. We have seen the bottom of the cycle,” said Credit Suisse economist Dong Tao.

Other indicators also show the economy is recovering.

Home sales surged 45.3 per cent in the first five months of the year from the same period of 2008.

Auto sales are up sharply, driven by cuts in sales taxes and other government incentives.

The contraction in imports was driven in part by a 30 to 50 per cent fall in prices of iron ore, oil and other commodities from last year’s highs, economists said. They said that meant the value of imports fell even as volume rose.

Beijing’s stimulus is based on heavy spending on construction of airports, highways and other public works. Most of the money has gone to state-owned construction companies, but it is spreading to the private sector as builders hire workers.

The spending also has fuelled a rise in imports of iron ore for steel and other building materials.

Associated Press

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