China’s export-driven economy is starting to feel the pinch of weakening global demand. Economic growth slowed to 9 percent in the third quarter, the lowest level in five years and a sharp decline from last year's 11.9 percent.

Attempting to head off the downward trend, the Chinese government unveiled a 4-trillion yuan stimulus package over the weekend. It is designed to boost domestic consumption and growth amid the worsening global economic situation.

The State Council, China’s cabinet, announced November 9 that a total of 4 trillion yuan will be invested in infrastructure and social welfare by the end of 2010. The goal is to push up annual GDP growth by 2 percentage points.

Spending will focus on 10 areas, according to the government’s statement. Emphasis will be given to construction of low-cost housing, rural infrastructure and transportation. The latter is especially important. With the new funds, the government hopes to build “a passenger transportation system, coal transportation projects, a railway system in the west and improve the country’s highway system and airports.”

Spending on health and education will also increase, as will funds earmarked for environmental protection and technology. Another share of the 4 trillion will go toward rebuilding areas damaged by the May earthquake and improving rural and urban incomes.

The government’s statement also alleged that reforms are on the docket for China’s value-added tax system, which may cut enterprises’ burden by 120 billion yuan, and that supporting the financial sector has taken on new importance.

Funding for the stimulus package will come from both the government and the private sector. The state Council said the central government will release 100 billion yuan over the forth quarter of this year, with another 20 billion yuan allocated for earthquake disaster regions coming in 2009. It is hoped that these infusions will incite more investment from local government and the private sector.

This is not the first time China’s central government has injected cash into the economy. Similar measures were taken in 1998 to deal with Asia Financial Crisis. But “the range of investment is even broader this time,” said Ma Liqiang, deputy secretary of the National Development and Reform Commission (NDRC). Unlike the 1998 measures, the new stimulus plan has emphasized investments in rural areas and improvements in quality of life.

According to Ma, the NDRC has also sped up the approval procedures for new construction and infrastructure projects, while simultaneously loosening some investment requirements.

These measures are expected to yield observable benefits for China’s economy in the next two years. Since investment accounts for 45 percent of China’s GDP, if the 4 trillion yuan investment and related measures can be implemented effectively, China’s economic growth should remain above 8.5 percent next year.

1 yuan = 14 U.S.cents