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FOCUS: China's Stimulus Focus Local; Won't Save The World

Published: 30 Nov 2008 23:15:25 PST

BEIJING --China is going all out to shore up its slowing economy, with massive government spending and interest-rate cuts. But countries hoping China will keep gobbling up their exports may be disappointed.

Beijing's huge economic-stimulus package will primarily help domestic sectors, while the areas of the economy that import high-end, value-added machinery will continue to suffer from the global downturn, analysts say.

Of the CNY4 trillion ($600 billion) in measures to be implemented through 2010, 70% will be spent to build railways, highways, airports and the power grid, and for reconstruction from snowstorms earlier this year and May's Sichuan earthquake, China's economic planning chief said Thursday.

Such spending on basic infrastructure will help counter a downturn in demand for iron ore and other raw materials from such commodities exporters as Australia. But China's stimulus won't give much direct support to countries that fuel China's export engine. The U.S., the E.U., Japan and other Asian countries supply China with much of the equipment and other inputs needed to make final goods for re-export.

"As China embarks on a massive infrastructural spend, while an 8% headline growth rate could be protected, China will only 'save itself,'" said Stephen Jen, global head of currency research for Morgan Stanley. "The rest of Asia and the world would still be adversely affected as the great export machine runs at half-speed."

Long dubbed the world's manufacturing backyard for its abundant land and cheap, plentiful labor, China is the linchpin for Asian manufacturers that churn out everything from toys, clothes and furniture to computers and consumer electronics that are shipped to mostly Western markets.

China's trade leans heavily toward making and assembling electronic and consumer products. Companies in Japan, the U.S. and Europe that make equipment used in Chinese factories - factory-automation equipment, for example - had seen their fortunes rise with China's manufacturing boom.

They aren't likely to get any direct boost from China's pump-priming. Nor will high-tech firms in Taiwan and Hong Kong.

China's economy, while still sizzling by Western standards, has slowed significantly in recent months. Gross domestic product grew 9% in the third quarter from a year earlier, well off last year's 11.9% expansion. The Organization for Economic Cooperation and Development this week forecast growth will slow to 8.0% in 2009 from a projected 9.5% this year.

Beijing has responded aggressively to the slowdown.

The headline figure for the stimulus package amounts to a whopping 16% of last year's gross domestic product; the economic planner said it will add a percentage point to growth. And the central bank stunned markets Wednesday by slashing key interest rates by more than 100 basis points, the most aggressive easing in more than a decade and following rate cuts late last month.

Weakening growth has undercut China's demand for foreign products. China's imports grew 15.6% in October from a year earlier, the slowest this year. Imports from the rest of Asia were up just 9.2%, far below the average 27% growth in the first seven months of the year, according to Nomura Economic Research.

Nearly half of China's trade receipts are from Asia, much of it materials destined for re-export as finished goods.

This "processing trade," accounting for around half of China's total trade activity, slowed to 12.9% on-year growth in the first 10 months of the year from 19% for all of 2007. Processing-trade growth for the first 10 months was barely a third of the 35.1% surge in "ordinary trade" - activity aimed at final demand in China.

Among China's top import sources, resource-rich Australia, Russia, Brazil and Saudi Arabia together supplied 8.5% last year - just two-thirds of what Japan alone contributed with its $133.95 billion in shipments to China, or a 14% share. Along with Japan, China's top trading partners last year were the E.U., U.S., countries in the Association of Southeast Asian Nations, Hong Kong, South Korea and Taiwan.

China's imports of machinery and electrical products, which account for half of total imports, grew 14.7% in the January-October period. This category has been decelerating on a year-to-date basis since June.

"That's why the future looks pretty bleak" for countries that count on Chinese demand for their capital goods, said Yung Chul Park, professor of international studies at Korea University.


-By J.R. Wu, Dow Jones Newswires; 8610 6588-5848; jr.wu@dowjones.com




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