China Should Upgrade Technology to Increase Demand, Zhou Says

By Li Yanping

Dec. 13 (Bloomberg) -- China central bank Governor Zhou Xiaochuan said companies and consumers should be encouraged to upgrade technology to boost demand at home as the global financial crisis hurts the nation’s economic growth.

“Upgrading technology can create huge demand,” Zhou said at a conference in Beijing today. Financial institutions should provide more funding so that companies can upgrade technology and consumers can buy more advanced products, he said.

Boosting domestic demand is the most important policy China will pursue to revive growth in the world’s fourth-largest economy, Zhou said. China’s economic slowdown is deepening, with overcapacity in almost all industries, and won’t bottom until after the first quarter of next year, officials said this week.

Zhou said that in the past China had had difficulty spurring domestic consumption because of a less developed social welfare system that encouraged savings and relatively slow income growth.

Exports fell for the first time in seven years in November, imports plunged and producer and consumer price inflation cooled as recessions in the U.S., Europe and Japan drove China’s economy into a slump.

“The international financial crisis is having a severe domestic impact,” Li Yizhong, head of the Ministry of Industry and Information Technology, said Dec. 12. “We don’t think we’ve bottomed out yet, and the impact will broaden further in December.”

Zhou’s bank last month cut the benchmark lending rate by the most in 11 years two weeks after the government pledged a 4 trillion yuan ($584 billion) stimulus package.

China’s growth has slowed for five consecutive quarters and its 9 percent third-quarter expansion was the weakest in five years. The World Bank last month forecast China’s growth next year at 7.5 percent, which would be the slowest pace in almost two decades.

Sustaining the economy is the government’s first priority, leaders said this week after an annual meeting to discuss economic policies for 2009. Zhang Ping, head of the National Development and Reform Commission, last month said the country faces “massive” job losses and social instability as faltering global demand cuts into exports.

The People’s Bank of China has shifted its monetary policy stance to “moderately loose” from “tight,” a policy adopted last year when the government ratcheted up interest rates and curbed lending to cool inflation that peaked at 8.7 percent in February. Inflation cooled to 2.4 percent last month.

Liu He, vice minister of the Central Leading Group on Financial and Economic Affairs, said yesterday that China’s expansion, which contributed the most to world growth last year, may slow in the first quarter next year.

China will have to run down excessive inventory for more than one quarter, causing economic indicators to worsen further, said Liu, whose group is a top policy-making body and advisor to government leaders.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net