A collapse in exports and industrial overcapacity are the two main factors dragging on China’s economy. The 6.1% expansion follows growth of 6.8% in the previous three months and 9% for all of 2008.

The global financial crisis has obliterated overseas demand for Chinese goods and factory closures have force millions of migrant workers back to the countryside. But still other data suggests that this could be the low point for China’s economy.

Industrial production expanded by 8.3% in March from a year earlier, up from 3.8% in the first two months of the year. Retail sales rose 14.7% – an indication that domestic demand is picking up. Auto sales jumped 10% in March from a year earlier, and 27% from February, to 772,400.

Even the decline in exports is slowing. After tumbling by 25.7% in February, exports fell 17.1% March.

Also, a 30.3% surge in urban fixed-asset investment – China’s benchmark measure of capital spending – is proof that the nation’s robust $585 billion in stimulus is beginning to take effect.

Beijing continues to assert that it will reach its growth target of 8% annual growth. And while independent analysts remain skeptical, they still foresee stronger growth for the Asian juggernaut going forward.

The Organization of Economic Cooperation and Development (OECD) forecasts 6.3% growth for China’s economy this year, compared with a 4.4% contraction in the United States. Royal Bank of Scotland Group PLC (ADR: RBS) has raised its forecast from 6.5% to a range of 7%-7.5%.

“The stimulus policies – both fiscal and credit expansion – led by the government is certainly the main driver of the rebound. The full impact of those stimulus policies will be shown in the coming months,” UBS Securities economist Wang Tao told The Wall Street Journal.

Wang estimated that first-quarter GDP grew around 7% from the fourth quarter on an annualized, seasonally adjusted basis, and she expects sequential growth of 12% in the second quarter.

Source: China’s Growth Slows but a Rebound May be on the Way

Wen’s new stimulus outline will raise the old-age pension for retired workers, boost the salaries of 12 million teachers, increase farmers’ income and provide more subsidies for them.

China will also cut taxes by $88 billion (600 billion yuan) and spend $124 billion (850 billion yuan) to reform reform the country’s hhe health care sector within three years.

These investments are considered separate from the $585 billion (4 trillion yuan) stimulus announced in November, but Wen made it clear that Beijing stands ready to expand its package as needed.

“We already have our plans ready to tackle even more difficult times, and to do that we have reserved adequate ammunition,” Wen said, referring to his nation’s nearly $2 trillion in foreign currency reserves. “That means that, at any time, we can introduce new stimulus policies.”

Investors’ confidence in China has started to wane recent months as unemployment has risen sharply and the nation’s once-vibrant manufacturing export sectors have shown signs of weakness.

After falling 17.5% in January, exports plunged 25.7% last month to $64.9 billion.  Imports fell 24.1% in February to $60 billion. Slightly more than 15% of China’s 130 million migrant workers – about 20 million people – have lost their jobs since the start of the global financial crisis.

However, Chinese officials continue to point to increases in fixed -asset investment and bank lending as evidence that the current stimulus plan is working. Fixed-asset investment in China climbed an estimated 26.5% year-over-year in the first two months of 2009, the National Bureau of Statistics said last week.

New domestic currency lending has increased as well, surging to 1.6 trillion yuan in January.

“I really believe we will be able to walk out of the shadow of the financial crisis at an early date,” Premier Wen said. “After this trial, I believe the Chinese economy will show greater vitality.”

With respect to the rising tide of unemployment, which could spur social unrest, Wen promised to focus on job creation, and to extend more aid to small businesses.

“We will pay all attention possible to this issue and we will never overlook this issue,” he said.

While many analysts have reduced their growth forecasts for the Chinese economy – some to as low as 6% – Wen continues to assert that China’s economy is on track for 8% growth this year.

“I believe that there is indeed some difficulty in reaching this goal,” Wen said. “But with effort it is possible.”

Premier Wen ‘Worried’ About U.S. Treasuries

While Premier Wen remains optimistic about the state of the Chinese economy, he is decidedly less confident in the outlook of the United States. Particularly, Wen voiced his concern about the value of China’s large holdings of U.S. Treasuries.

“We have lent a huge amount of money to the United States,” he said. “Of course, we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

Of China’s $2 trillion in foreign currency holdings, about $1 trillion is invested in U.S. Treasuries and notes issued by other government affiliated agencies, such as Fannie Mae (FNM) and Freddie Mac (FRE).

Last summer, China’s big state-owned banks began dramatically reducing their holdings in Fannie Mae and Freddie Mac debt. China had held about one-fifth of its currency reserves in Fannie and Freddie debt last fall, The Washington Post reported.

At the end of last year, China held about $696 billion in U.S. government securities – 46% more than at the end of 2007.

“They are worried about forever-rising deficits, which may devalue Treasuries by pushing interest rates higher,” JP Morgan & Co. (JPM) analyst Frank Gong told The Associated Press. “Inside China, there has been a lot of debate about whether they should continue to buy Treasuries.”

Earlier this year, the Congressional Budget Office (CBO) projected that the U.S. budget deficit would nearly triple from last year’s $455 billion – and would reach a staggering $1.2 trillion. And that was even before President Obama unveiled his $787 billion stimulus, bank-rescue and anti-foreclosure plans – or other fix-up initiatives that are sure to surface in the months ahead.

The value of U.S. Treasuries has dropped steadily since the Obama administration began selling record amounts of debt to finance its economic stimulus packages. Investors lost an average of 2.9% in 2009, according to Merrill Lynch’s U.S. Treasury Master Index.

China should seek to ”fend off risks” by further diversifying its reserves, Wen said.

“We have already adopted a guiding management policy of diversifying our foreign exchange reserves, and at present our foreign exchange reserves are safe overall,” Wen said. “Our first principle in managing foreign currency is averting risk. We have always adhered to the principles of foreign currency security, liquidity and maintaining value, and implemented a strategy of diversification.”

As Money Morning detailed in as investigative report last September, the very possibility that China and other foreign countries would stop buying U.S. bonds already was enough to prompt the U.S. government to take control of foundering mortgage giants Fannie Mae and Freddie Mac.

If China, which is the United States’ largest creditor, were to continue to shy away from U.S. debt, it might find itself with even more influence over U.S. government policy. And if China were to stop buying Treasuries altogether, the results would be catastrophic. It’s conceivable that the United States wouldn’t be able to continue with its current rescue strategies, and that could ultimately lead to the collapse of the U.S. dollar.

The U.S. Treasury Department responded to Wen’s concerns Friday.

“The U.S. Treasury market remains the deepest and most liquid market in the world,” said Treasury spokeswoman Heather Wong. “President Obama is committed to taking the steps necessary to restore growth and put this country on the path of fiscal sustainability, including cutting the long-term deficit in half over the next four years.”

Source: Chinese Premier Announces New Spending Plan, Voices Concern Over U.S. Treasuries