Migrants on a flatbed tricycle, a popular mode of transport for those who cannot afford a car, in Beijing on December 17.

China may need a second stimulus package focused on boosting consumption and helping the poor as the economy slumps before 4 trillion yuan (US$585 billion) of infrastructure spending kicks in.

China should cut taxes, do more to boost incomes, and follow Japan and Taiwan in handing out shopping coupons, economists at Merrill Lynch, China International Capital Corp. and Barclays Capital said. Announcing a package of measures could help revive confidence as a slowdown deepens in the world’s fourth- biggest economy.

“The government may announce a package at the start of next year to try to revive confidence,” said Xing Ziqiang, a Beijing- based economist for CICC. “That’s when the economy may be at its worst.”

The country can sustain a deficit of as much as 900 billion yuan ($131.6 billion) next year, up from this year’s budgeted shortfall of 180 billion yuan, to fund measures to boost consumption, according to Xing.

One measure would be to raise the threshold for individual income tax from 2,000 yuan, a proposal discussed at an economic planning summit this month, according to state media.

Spending jolt

Another would be to issue shopping coupons, giving an immediate jolt to consumption, according to CICC’s Xing. Taiwan announced a voucher scheme last month and Japan did the same in 1999.

The south-west city of Chengdu is giving 100-yuan coupons to 380,000 people, including low-income earners, the local government said this month, adding that it was the first Chinese city to do so.

The cabinet pledged November 9, when it unveiled the infrastructure spending package, to boost incomes and consumption via measures including subsidies for the urban poor and farmers.

It may need to do more, faster, said Peng Wensheng, head of China research at Barclays Capital in Hong Kong.

“To stimulate consumption may be more difficult than boosting investment by directly increasing spending,” said Peng. “The government has to act early rather than late.”

Deepening slump

China’s economic slowdown is deepening because a slump in the property market and construction has coincided with waning overseas demand for the nation’s toys and computers.

The World Bank forecasts a 7.5 percent expansion in 2009, the nation’s weakest growth in almost two decades.

Last month, the lender said China needed to more quickly switch from investment, exports and industry to consumption and services as the drivers of growth.

Boosting spending on health, education and social welfare would aid low-income earners and “reduce the reluctance to consume,” it said in a report.

The National Development and Reform Commission, the nation’s top economic planning agency, has proposed income-tax cuts, salary increases and larger housing subsidies, the Economic Observer newspaper reported November 23.

Source: Bloomberg