The Chinese government has begun drafting tax and spending policies to stimulate the economy after economic growth slowed in the third quarter of this year to 9 percent, the slowest pace since an outbreak of SARS in 2003.

Industrial production and construction slackened from July through September because of weak exports, a slumping real estate market and temporary restrictions imposed during the Olympics, the Chinese National Bureau of Statistics announced Monday.

The Chinese State Council, or cabinet, met over the weekend and decided to shift the emphasis of economic policy toward maintaining "a stable and rapid economic development," state-controlled media reported Monday. The previous policy had been "to ensure growth and control inflation."

As part of the new policy, the State Council announced that it planned to increase export tax rebates for everything from labor-intensive products like garments and textile to high-value products like mechanical and electrical products. Banks will be encouraged to lend more money to small and midsize enterprises and a variety of support programs will be drafted to help farmers, the government said.

Government ministries will also spend more to rebuild earthquake-damaged areas of southwestern China, to improve transportation links and other infrastructure and to improve the social welfare system, said Xinhua, the official news agency, without providing details.

Hu Angang, a prominent Chinese economist who is director of the Center for China Studies at Tsinghua University in Beijing, said in an interview in Beijing on Friday that the government was drafting plans to step up its spending on vocational training and other educational programs for adults. The goal is to help Chinese workers make the transition away from low-wage, low-skill assembly line tasks in export-oriented factories and provide these workers with the diverse skills necessary for an internationally competitive economy that balances the service and manufacturing sectors.

"The government needs to give consideration to human capital investment," Hu said.

Chinese officials insist that their country will only suffer limited harm from the global financial crisis, mainly through slower exports. "Our economy remains vigorous and has the capability to defend itself against international risks," Prime Minister Wen Jiabao said Friday.

Increased export tax rebates will make Chinese exports even more competitive in the United States and Europe, particularly as China has also intervened heavily in currency markets to halt any further appreciation of the yuan since mid-June. But with the United States heavily dependent on China to buy the Treasury bonds needed to finance a bailout of the U.S. financial system, the Bush administration has stopped criticizing China's trade and currency policies.

Policy makers in almost any country except China would be delighted with 9 percent growth, particularly given the turmoil in financial markets that was worsening at the end of the third quarter.

The central bank of India announced Monday that it was cutting its benchmark interest rate by a full percentage point, to 8 percent, as annual growth in industrial production there has slowed to a crawl. The Hong Kong authorities said Monday that unemployment in the territory crept up to 3.4 percent for the period from July through September, compared with 3.2 percent for June through August.

But China faces a particularly acute need to maintain high growth rates. Its cities are growing by nearly 20 million people a year, mainly because of migration from lower-income rural areas.

Most economists estimate that 8 percent growth is needed to prevent urban unemployment from rising, which could trigger demonstrations and undermine the country's social stability.

Clement Chen, chairman of the Federation of Hong Kong Industries, which represents the employers of 10 million workers in mainland China, said that the policies chosen by the State Council would reduce the number of factory bankruptcies and layoffs likely in the months ahead. But he predicted that the policies would not halt the overall deterioration in business prospects for exporters in China.

"The worst impact, the worst situation, is not here yet," he said. "I do believe 2009 will be worse than 2008." Corporate executives from cities across China said in interviews last week at the Canton Fair in Guangzhou and the Global Sources consumer electronics show in Hong Kong that while layoffs are rising, joblessness does not yet appear to be a serious problem.

Many laid-off migrant workers in export-reliant regions like Guangdong Province have returned to their home villages, since high food prices have made farming more remunerative.

Others are finding jobs in inland cities that depend more on consumer demand within China.

Workers are not yet lining up outside factory gates in search of work, as they did a decade ago. But they are nonetheless becoming easier to find and hire, said Bill Chen, a sales manager at Tinly Jieyang Electro-Acoustic Devices, a manufacturer of automotive stereo speakers in Shenzhen that recently halved its work force to 100 employees.

"At the beginning of this year, it was quite hard, but now it is not difficult," Chen said.

Some economists had suggested in August that the forced closing of many factories during the Olympics, to provide cleaner air for the athletes, had been the main factor behind the beginnings of weaker economic activity. But extensive statistics released Monday by the Chinese National Bureau of Statistics pointed to a much broader pattern of weaker growth than could be readily explained by the Games.

Many factories, power plants and other operations reopened in the Beijing area last month. Yet industrial production expanded less briskly in September, rising 11.4 percent from a year earlier, compared with August, when it grew 12.8 percent.
China has more options than most countries to cope with slower growth.
For starters, inflation is slowing at the consumer level - the government said Monday that it was 4.6 percent in September, down from 4.9 percent in August and the fifth monthly decline.

With less to fear from rising prices, the Chinese central bank has already begun reducing regulated interest rates and loosening restrictions on bank lending, even though these steps could result in an expansion of the money supply and some increase in inflationary pressures. With the government running a large budget surplus, the Finance Ministry has begun lowering taxes on stock market transactions.
Growth of 9 percent in the third quarter was slower than most economists had expected. Surveys of economists' expectations for the past quarter had found average forecasts of anywhere from 9.1 percent to 9.7 percent, depending on which economists were included and when they were asked.

Output in the third quarter of this year was the weakest since the economy expanded 7.9 percent in the second quarter of 2003, when an outbreak of SARS closed many businesses.