China to spur slowing economy

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By Keith Weir

LONDON (Reuters) - China pledged fresh measures to revitalize its economy on Wednesday after exports tumbled and domestic demand shrank, with bleak figures from Europe showing how badly its major trading partners were faring.

Industrial output sank in several European economies in October, as economic torpor forced the car industry and other hard-hit sectors to cut production.

Some solace came from progress in talks to try to rescue the ailing U.S. auto industry.

The House of Representatives could vote as early as Wednesday on a $15 billion plan to bail out and restructure U.S. automakers but the initiative may face possible roadblocks in the Senate, officials said.

That was a rare bright spot when a growing list of companies was shedding jobs in response to dwindling demand.

Global miner Rio Tinto said it was cutting 14,000 jobs, while Sweden's SKF, the world's biggest bearings maker, is axing 2,500 jobs because of declining demand.

Responding to slower growth, China's top leadership pledged to ramp up public spending and cut taxes to promote domestic demand in the world's fourth-largest economy.

"The general requirements for next year's economic work are maintaining stable but rapid economic growth by boosting domestic demand," state radio reported at the conclusion of a three-day meeting of the Central Economic Work Conference.

Shock trade figures showed the impact of the downturn, which began with a U.S. housing market collapse and has now plunged much of the world into recession, on China.

Its exports shrunk 2.2 percent year-on-year in November, the largest drop since 1999. Imports tumbled almost 18 percent, the biggest fall on record, showing its economy is also being squeezed by weakening domestic demand.

The World Bank predicted China's economy would grow 7.5 percent next year -- far below the expected 9.4 percent for 2008.

Chinese state media have said the authorities would do all they could to "protect eight" -- a reference to the 8 percent growth rate widely thought to be necessary to create enough jobs for the millions of people entering the work force every year.

"Global demand for Chinese products is vanishing," said Gene Ma, an economist at China Economic Monitor, a Beijing consultancy. "Secondly, the credit freeze in importing countries has made it hard for Chinese exporters to sell abroad."

EUROPE OUTPUT SLIDES

Industry output fell in France, Italy, Sweden and Greece in October.

Analysts said November and December would be even worse and several said they would be scaling back their already-negative outlooks for fourth quarter gross domestic product.

"Industrial output in the euro zone has fallen into a very deep recession, suggesting that GDP in Q4 could contract even more sharply in Italy, France and Germany than is currently assumed," said Holger Schmieding, a Bank of America economist.

The U.S. economy is likely to shrink 1.1 percent next year as job losses mount, a survey said

However, U.S. shares were expected to open higher, with General Motors and Ford bolstered by the bailout plan. Shares in Europe edged lower.

SUB-ZERO CHILL

Investors fearful of deflation and riskier assets had scrambled to hand over cash to the U.S. Treasury in return for no interest at an auction on Tuesday, while interest rates on some Treasury bills rates fell below zero in the market.

When rates turn negative it shows investors are so concerned about the safety of assets that they are willing to effectively pay the U.S. government a fee to hold their cash.

With limited scope for further interest rate cuts from the present levels of 1 percent, economists are expecting the U.S. Federal Reserve to look at new ways to boost the supply and circulation of money to avoid a deflationary slump.

The Wall Street Journal reported on Wednesday that the Fed is considering issuing its own debt for the first time.

Fed officials have approached Congress about the move, which could include issuing bills or some other form of debt and would provide the central bank with more flexibility to tackle the financial crisis, the Journal said.

(Editing by Mike Peacock)

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