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Thursday, March 4, 1999 Published at 17:42 GMT

Business: The Economy

China sinks into the red

China's economy is losing its sparkle

The Chinese government is to set to announce its largest budget deficit in 20 years as it struggles to maintain the momentum of economic growth.

In a speech to delegates of the National People's Congress on Friday, Prime Minister Zhu Rongji is expected to announce that this year's budget deficit will be 150.3bn yuan (£11bn, or $18bn), an increase of 56% since last year.

[ image: More government spending projects are planned]
More government spending projects are planned
The government hopes to maintain a 7% growth rate for the economy by boosting spending on public infrastructure projects, following 1998's 7.8% growth. But that will be difficult, as China's exports failed to increase at all last year after achieving double digit growth in previous years.

"The external economic environment we face this year remains extremely serious .. It will be difficult to see a relatively big increase in domestic consumption demand for a period of time," Mr Zhu reportedly will say.

China faces problems in privatising its ailing state industries whose losses are absorbing an increasing share of public spending.

Many economists are sceptical of China's ability to reach its growth target this year.

Although the budget deficit is still only 2% of GDP, tax revenues are in long term decline. Foreign companies have reported increased pressure by the tax authorities who are scrutinising their bills for missing back payments.

Banking reform

China's banking sector is also is trouble, after the failure of one of the largest foreign investment trusts, GITIC (Guangdong International Trust and Investment Company) in December.

The government has said it will close down other failing investment trusts, which have been a vehicle for foreign investment in China but have become over-exposed in the property sector.

As well as paying the cost of such closures, the governor of the Bank of China, Dai Xianglong, announced that bad debts held by China's four state-owned commercial banks would be restructured, by setting up four asset management companies to mop up the problem loans. Some estimates put the total bad debts as high as $200bn.

The government may have to introduce measures to boost the small domestic bond market in order to fund its increased borrowing.

Reflation in Hong Kong

The government of the special administrative region of Hong Kong has also announced budget-busting measures to counter-act the effects of the worst recession in living memory.

Donald Tsang, Hong Kong's financial secretary, said that the budget deficit would rise to 2.8% of GDP (gross domestic product) as growth stagnates after a year in which it fell by 5%.

He plans to give out a 10% rebate to all taxpayers, as well as boosting spending on infrastructure such as a new Disney theme park.

But public sector wages would be frozen, and the Mass Transit System partly privatised.

The Hong Kong government also said that it would gradually sell most of its $15bn holding in Hong Kong companies which it acquired last year in order to stop speculation against its currency, and merge the stock exchange and futures market.

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