China Sets Economic Path for 2010

Top PRC leaders set a cautiously optimistic tone for China’s 2010 economic development at the December 2009 Central Economic Work Conference, the most authoritative annual conference on China’s economy. The conference gathered China’s top central- and local-government leaders to discuss the past year and plan broad macroeconomic policies for 2010. As expected, the December meetings focused on policies to cope with the global financial crisis and promote economic recovery. Government leaders decided to maintain current macroeconomic policies, continue bank lending and public investment, and keep a “relatively loose” monetary policy to ensure economic growth of more than 8 percent.
Government spending will continue

The leaders emphasized “continuity and stability” at the December conference and indicated that government investment will continue, at least in the short term. Analysts are concerned that continued stimulus measures will result in excess liquidity and rising inflation in the near future, but PRC leaders said that flexible policies will allow them to address such problems quickly. To stave off a liquidity glut and lessen the negative impact of overcapacity, China plans to redirect stimulus spending away from fixed-asset investment and into social services such as healthcare and education.

Efforts to boost domestic consumption

The conference stressed the importance of transforming development patterns so that China’s economic growth relies less on foreign trade and investment and more on domestic consumption. To boost consumption, the government plans to increase pensions for retirees and raise the earnings of China’s low- and middle-income population.

China will also continue to implement the following eight policies in 2010:

• Home appliances replacement  In June 2009, China began offering subsidies of up to 10 percent on purchases of new televisions, computers, refrigerators, air conditioners, and washing machines in nine pilot cities. China will increase the number of participating cities in 2010.
• “Home appliances to the countryside”  Farmers will receive a 13 percent subsidy on purchases of certain home appliances such as television sets, refrigerators, washing machines, handsets, computers, and water heaters. Higher-priced products will be added to the list.
• Subsidy for agricultural machinery purchases  The central government will subsidize the purchase of products listed in the 2009 Catalogue of National General Agriculture Machinery Supported by Purchase Subsidies. The current subsidy ranges from ¥50,000 to ¥120,000 ($7,322-$17,572) per unit, depending on the product. The government will raise the subsidy amount in 2010.
• Preferential tax rate for vehicle purchases  China will extend a 7.5 percent preferential purchase tax rate for the purchase of vehicles with engines smaller than 1.6L and increase the subsidy amount from ¥5,000 to ¥18,000 ($732-$2,636) for replacing old vehicles.
• “Vehicles to the countryside”  China will extend its rural subsidy programs to the end of 2010 for vehicle purchases and until January 31, 2013 for motorcycle purchases.
• Energy-saving product promotion  China will promote and subsidize the purchase of energy-saving products, including lighting products and new-energy vehicles.
• Business tax exemption for personal real-estate transfer  China will allow a five-year business tax exemption for individual real-estate transfers.
• Delayed payment for social pension and reduced social insurance rates  China will allow delayed, reduced, or flexible payments for social pensions and insurance fees for individuals and enterprises experiencing financial difficulties in 2010. This policy applies to foreign-invested enterprises operating in China.

Developing urban and rural areas

China’s leaders also emphasized the need to speed up urbanization to further boost domestic consumption and drive sustainable economic growth. They pledged to relax China’s urban residency restrictions to foster a greater demand for property in second- and third-tier cities and spur more construction projects in 2010.

To develop rural areas, the PRC government will continue subsidies and tax support for agricultural programs. It will also promote the construction of agricultural infrastructure, water resource projects, energy-grid upgrades, roads, and public service infrastructure in rural areas.

A shift to more sustainable growth

China’s leaders highlighted government support for developing “new strategic industries.” This will likely mean more investment in areas such as advanced machinery, science and technology, energy conservation, and environmental protection. By developing these emerging industries, China hopes to create more jobs, retrain workers in industries suffering from overcapacity, and lessen pressure on raw materials, commodities, and energy inputs.

[box] This article is adapted from a report that first appeared in China Market Intelligence, the US-China Business Council’s (USCBC) members-only newsletter. To find out more about USCBC member company benefits, see www.uschina.org/benefits.html. [/box]