"Whether we can turn this pressure into momentum, turn challenges into opportunities, and maintain steady and relatively fast economic development … is a test of our party’s capacity to govern." So said President Hu Jintao at a Politburo meeting in late November.
At December’s Central Economic Work Conference, leaders decided to meet that test with a plan to boost the economy through demand and job creation.
The conference revealed that an emphasis will be put on encouraging "fast-paced" growth, and on areas of the economy not focused on exports.
Reaching those goals will be eased by Beijing’s US$586 billion economic stimulus package and a loose monetary policy. To that end, the People’s Bank of China cut interest rates by 108 basis points, the most in more than 10 years, in late November. The State Council also announced that it would increase the money supply by 17% in 2009 to spur consumer spending.
These policies become all the more important in the face of weakening external demand, which is taking its toll on domestic industries. The Purchasing Manager’s Index, a leading indicator of factory activity, fell by its largest-ever margin, dropping to 38.8, from 44.6 in October. A reading below 50 indicates contraction. Overall industrial production growth fell to 5.4% in November, the slowest non-holiday level since records started in 1994. Urban fixed-asset investment growth slowed to 26.8% in the first 11 months, down from 27.2% growth through October.
Slowing growth also appears to be driving away overseas investors. Foreign direct investment fell by 31.2% in November, although inflows remained up more than 26% over the first 11 months.
Meanwhile, consumer price inflation fell to 2.4% in November, from October’s 4%, while producer price inflation fell to 2.0% from 6.6% in October. Once preoccupied with inflation, now deflation is among China’s concerns.