posted November 09, 2008 01:34 PM            

The stimulus package has both economic and political dimensions for the Hu Jintao regime, which has been trying to change the course of industrial development for the past two years, sources said. The package aims to generate domestic demand and China's dependence on exports.

At the same time, a lot of money will be spent on areas like rural infrastructure and housing for the poor that are not directly affected by the global crisis. The purpose is to use the occasion to meet the Communist Party's new political agenda, which involves taking the focus of development from the relatively developed south China to underdeveloped areas of northern and western China.

The government said it will invest a lot more on housing for low income groups, rural infrastructure, social welfare, transportation networks, environmental protection and technical innovation. It will also invest in certain key economic sectors as part of an "active" fiscal policy.

The plan also involves an increase in bank lending to small and medium enterprises, many of which have been hit very hard by the global slowdown. Most SMEs engaged in meeting the Christmas market including the toy industry has been hit very hard by the slowdown.

The move comes soon after official accountants declared that the rate of growth of gross domestic product had slumped to nine per cent in the third quarter from 10.4 per cent in the first quarter of this year. The People's Bank of China has cut interest rates three times since mid-September and scrapped lending quotas in an effort to boost the economy.

The national cabinet led by premier Wen Jiabao also reassured the public that it was going ahead with the planned reform to change the manner in which value added tax is calculated. The move will result in a saving of 120 billion ($17 billion) for companies and consequent reduction in the government's income.