The government says that the prospects for the coming year are poor, after a year in which China escaped the worst of the Asian crisis with a 7.8% growth rate. The stability of China is seen as vital for the economic recovery of the whole region.

"The external and internal situations in 1999 leave no room for optimism," the Ministry of Finance said in a statement.

Exports have stopped growing, after a 20% increase in 1997, state-owned enterprises continued to show a poor performance, and the Asian crisis was still "biting and aggravating."

Avoiding the Asian contagion

The government will spend heavily on flood damaged areas

China's Finance Minister, Xiang Huaicheng, said that China will spend to avoid plunging the country into a recession. He said that the government will "continue to pursue pro-active fiscal policies, which would necessarily increase the budget deficit to a certain extent."

But he said that the move would not be inflationary, given weak demand, while in the long run China would continue to maintain a moderately tight fiscal stance, with a view towards establishing a balanced budget, and promoting private investment.

The government would spend money on infrastructure, rebuilding river embankments, roads, and irrigation systems, some of which were severely damaged by the summer's floods.

Consumer confidence low

Although the Chinese domestic consumer market has been growing fast, especially in the big cities, the threat of job losses, especially at state-run firms, is hurting confidence.

As a result, the retail price index dropped by 2.6% last year, while the broader consumer price index, which includes services, was down 0.8%.

"Conventional consumer goods have lost much of their glamour and the demand for new ones has yet to come. Consumer prices remain low, but people tend towards saving more than usual," the government said.

Finance Minister Xiang said that the government hopes to construct a social safety net in the next three to five years. The absence of any social benefits has made the impact of unemployment much more severe.

Big government deficit

In order to finance its spending, the government deficit next year may be higher than its previous estimate of $12.75bn (105.3bn yuan).

The government plans to issue $38bn in domestic bonds. It also wants to raise more money overseas after its successful $1bn Yankee dollar bond last year, in order to stimulate China's integration into world capital markets.

The government will extend preferential treatment to foreigners in order to help boost investment and exports, and it may also have to use state funds to bail out some of China's freewheeling financial institutions, which are burdened with foreign-denominated debt.