Exclusive: China can cut spending on strategic sectors (Reuters)

BEIJING (Reuters)-China can rein in plans to invest heavily in seven new strategic industries, including power rail and high-speed wind projects back at the forefront of the industries that suffer from problems of old-fashioned, as corruption and overcapacity, said sources of resizing.

Beijing originally planned to invest up to $ 1.5 billion over the next five years in seven sectors, hoping it would grow into a pillar of economic growth and help to shift the second largest economy in the world away from a focus on producing cheap goods.

The pullback on spending stems in part from worries about corruption in high speed rail project in the country and concerns of overcapacity in wind power sector, said two sources with ties to the Chinese Communist Party leadership and knowledge of the plan.

"The Government is now reviewing the new floor of the seven strategic areas," a source told Reuters, requesting anonymity because he was not allowed to speak to reporters.

"The scale (size) is still under deliberation," added the source.

Beijing has long used infrastructure spending to create jobs and economic activity, most recently, tapping into the coffers of the Government to stave off the effects of the global financial crisis.

While high rates of fixed asset investment have helped to maintain strong growth, some economists, such as Nouriel Roubini, have argued that China's current levels of investment are unsustainable.

These days, China is most concerned about taming inflation and maintaining a mountain of debt accumulated by local governments, and provincial estimates of auditor of State of the country to 10.7 billion yuan ($ 1.65 billion).

Strategic industries cover alternative energy, production of high-end equipment, biotechnology, information technology of new generation, alternative fuel cars and energy-saving technologies and environmental protection.

Analysts welcomed the news, which could mean fewer loans by local governments and faster consolidation of sectors like wind power.

"A lot of these projects is already in issue on account of their liability (debt) and safety standards," said Kevin Lai, an economist with Daiwa in Hong Kong.

"Is the question that must be asked: is (expansion of investment-driven) the kind of growth that China really wants?"

TROUBLE IN HIGH SPEED TRAIN

Lower spending on high-speed rail is directly related to the departure of the railway Minister, sacked this year under a cloud of corruption, the sources said.

The former Minister, Liu Zhijun, drove high-speed rail expansion in China, until it was removed in March for "violations of discipline," a charge commonly used to denote the corruption. There were no further details.

Premier Wen Jiabao in April warned against corruption linked to major projects, saying "cadres, their families and staff as well as heads of State-owned enterprises, financial institutions and academic institutions of the State not to intervene or manipulate tenders in any form."

The Ministry has denied any plans to cancel or downgrade railway lines. But the new Minister Sheng Guangzu put investment in railway infrastructure in 2011 to 600 billion yuan (92 billion dollars), compared to the pledge of Liu's 700 billion yuan.

Mandate of Liu saw the rapid development of high-speed railway network of China pushing the bullet train Japan's plans to become, at 8,400 km (5,000 miles), the longest in the world. Liu had planned to Boost the network of 50,000 kilometers (30,000 miles) by 2015. Sheng said the official people's daily that it would build a slightly more modest 45,000 miles.

The Ministry, already deep in debt, expects to spend another 2.8 billion yuan between now and 2015. But some analysts believe that the surge of investment has left with an unsustainable debt burden.

Even so, China is unlikely to dispense with high-speed rail.

"The Central Government is of the opinion that building high-speed rail will still (but) investment will be uniformly distributed, the pace of construction will be slightly slower and more thorough research will be," said Yan Dong, a researcher at the State-linked Institute of comprehensive transportation.

PULLBACK ON WIND ENERGY

Also to be flayed back are plans for wind energy. Shao Bingren, vice President of the Commission for a top advisory body, warned that the wind energy industry is already suffering from overcapacity. The State of design national development and Reform Commission and the national energy Administration to build seven wind power plants in Western China, with a generating capacity of at least 10 million kilowatts each, according to the plans of the country's five-year XII. But critics say that these projects could be recommended-requiring heavy expenditure in power grids, because the wind and solar power plants are located mainly in Western regions, inland, while the production bases are concentrated in remote coastal provinces. "Many investors and local governments are not mentally prepared and new energy thinks is all-purpose, clean, conforms with the requirements of the country and very profitable" Shao wrote.

A pullback on investments in the field of wind would be positive for the major turbine makers, said Peter Yao BOCI, research analyst in Hong Kong.

"If you raise the bar and consolidate the industry actually is positive for the protagonists as Goldwind (2208.HK) and the China high speed transmission (0658.HK)," he said.

"But for Longyuan (0916.HK) is of course negative, as developers of wind farm will face the higher costs to develop new business."

Longyuan actions fell more than 5 percent on Thursday while Goldwind shed 2.2 per cent and the CHST fell 1 percent. Currently, the value-added output of seven strategic sectors together account for about 2 percent of gross domestic product. The Government has said it wants them to build the 8 percent of GDP in 2015 and 15 percent by 2020.

This percentage can fall under plans scaled back.

($ 1 = 6,465 yuan)

(Additional reporting by Xin Zhou, Jenny On Master, Farah and Gui Qing Koh; Brian Rhoads and Editing by Lincoln feast)

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Government of Ontario optimistic spending plans: auditor (Reuters)

TORONTO (Reuters)-Ontario's latest spending forecasts are optimistic and aggressive, the province's Auditor General said on Tuesday, which can make it difficult for the Government to achieve its fiscal targets.

The auditor's report comes just three months before an election in October. The Liberal Government are final the main opposition Progressive Conservatives in recent surveys.

Under the legislation introduced in 2004, the Government of Ontario is required to release a pre-election report on the finances of the province, including revenue and expense projections for three years. It is also necessary that the tax plan should be based on assumptions.

"He's going to be very challenging ... This is a set of assumptions quite upbeat and aggressive. Really, things must go right, "Auditor General Jim McCarter told reporters.

"The risk would be basically you have a much greater risk of not meeting your goals tax if the things I hope they are going to happen does not happen," he added.

McCarter has ascertained that the Government's plan is largely tied to its ability to freeze public sector salaries, constituting half of public spending.

However, since government announcement to freeze salaries in 2010, he noted that about 60 percent of compensation agreements with the public sector have led to pay raises.

The forecasts were in line with estimates the budget in March, when the Government has predicted would be needed until 2017-18 to eliminate its deficit c 16.3 billion (16.6 billion dollars).

McCarter has concluded that the estimates of revenues and costs of interest on the debt of the province were in fact "prudent and cautious".

Expenses thus-the other half of the equation that the Government has actually control against economically driven-revenues were seen with more skepticism.

The auditor's report notes that the Government says it will spend an average of only 1.8% more in each of the next three years, although its annual spending growth over the past eight years, after adjusting for one-time expenses, an average of almost 7 percent.

Ontario Finance Minister Dwight Duncan said in response to the report which he has characterized the spending assumptions as aggressive, adding that the province's deficit targets are not at risk.

"In fact, we overachieved and he doesn't say that. I think what he says is that he speaks, he speaks of contingency. "He talks about the conservative nature of our revenue projections, Duncan told reporters.

"On balance, I thought that his report was right ... I think we're on target moving forward. "

($ 1 = $ 0.98 Canadian)

(Reporting by Claire Sibonney; editing by Rob Wilson)

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Lawmakers harden positions on taxes, spending (Reuters)

WASHINGTON (Reuters) – Republicans and Democrats dug in their heels Friday as President Barack Obama prepared to wade into a divisive debate over taxes and spending aimed at heading off a default on the U.S. government's debt.

The White House said Obama would meet separately with Senate Democratic and Republican leaders Monday in an effort to resurrect negotiations that collapsed when Republicans walked out Thursday over Democrats' demands for tax hikes.

"The president is willing to make tough choices but he cannot ask the middle class and seniors to bear all the burden for deficit reduction and sacrifice while millionaires and billionaires ... are let off the hook," said White House spokesman Jay Carney aboard Air Force One.

Republicans Friday ruled out any tax increases as part of an agreement to narrow stubborn budget deficits and raise the U.S. debt limit. The federal deficit now stands at $1.4 trillion, among the highest levels relative to the economy since World War Two.

The $14.3 trillion U.S. debt ceiling must be increased before August 2 or the Treasury Department will run out of money to pay the country's bills. A default on debt payments could send markets plunging around the world and raise the risk of another U.S. recession.

House Speaker John Boehner and fellow Republicans say any package that includes tax increases stands no chance of passing the Republican-controlled House. Senate Republicans threaten to block the measure if it includes tax increases.

"A tax hike can't pass the Congress. They might as well ask us to herd unicorns through the Senate chamber," said Don Stewart, spokesman for Senate Republican leader Mitch McConnell. "It just can't happen."

Conservatives in Congress, including many Tea Party activists who are credited with winning the House for Republicans in the 2010 election, have questioned whether there really is a pressing need to increase the debt limit. They have laid down tough prerequisites to win their votes, including passage of a balanced budget amendment to the Constitution.

Democrats have expanded their demands in recent days to say any package must include measures to boost the struggling economy, which could add to the deficit. They say they will not support a package that relies only on spending cuts.

"Make no mistake. there needs to be revenues in any deal," said senior Democratic Senator Charles Schumer.

Treasury Secretary Timothy Geithner said he was confident Congress could still reach a budget deal, but that it would have to include some tax hikes.

"You need to have modest changes in revenue," Geithner said in New Hampshire. "There is no way to do a deal without it."=

ON THE TABLE

Democrats have eased back from their insistence that personal income tax rates need to rise on the wealthiest Americans to focus instead on ending a wide range of tax breaks on everything from corporate jets to oil and gas subsidies.

They have also proposed closing tax breaks that benefit the wealthy, such as limiting the deductions for households making more than $500,000 a year.

Representative Chris Van Hollen, one of the Democrats who was involved in the failed talks led by Vice President Joe Biden, said Republicans had refused to budge.

"What we've seen is all take and no give," he said.

A senior administration official said eliminating loopholes and tax breaks on corporate jets, energy companies and hedge funds, and capping itemized deductions for wealthier Americans -- all steps identified in Obama's 2012 budget -- could save $400 billion over 10 years.

"This is what they are throwing the fit about. Because they somehow believe that special loopholes for millionaires and billionaires, oil and gas subsidies -- somehow they are willing to go to the wall for that," said a second senior administration official.

But a Republican source familiar with the talks said Democrats were also pushing repeal of the "last in first out," (LIFO) accounting convention that he said would cost manufacturers billions of dollars, while capping itemized deductions would hurt hundreds of thousands of small U.S. businesses.

"They're not talking about a few tax loopholes. They're talking about hundreds of billions of dollars. You can't get there by just going after corporate jets," the source said.

The National Association of Manufacturers estimates that repealing LIFO, which allows companies to match sales revenues against inventory replacement costs, would raise taxes for U.S. companies by $50 billion over 10 years.

Boehner said if Obama offered up spending cuts that were at least the size of a debt limit increase -- thought to be around $2 trillion to $2.5 trillion -- and if new budget reforms were put in place, "He has my word that the House will act on it."

Those are requirements Boehner and fellow Republican leaders have been voicing for months.

"We believe that we can move forward, as long as no one in these talks takes a my-way-or-the-highway approach," Carney said.

(Editing by Peter Cooney)

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