Bloomberg News

China Slower Output Gains Complicate Easing Policies

September 09, 2012

Shipping containers are stacked at a port in Shanghai

Shipping containers are stacked at the Yangshan deep water port in Shanghai. Photographer: Kevin Lee/Bloomberg

China’s industrial output grew at the slowest pace in three years and President Hu Jintao said economic expansion faces “notable downward pressure,” signaling that officials may need to add further to stimulus after approving subway and road projects.

Production increased 8.9 percent in August from a year earlier and fixed-asset investment growth in the first eight months eased to 20.2 percent, the National Bureau of Statistics said yesterday in Beijing. Inflation accelerated for the first time in five months.

The data underscore risks that full-year growth in the world’s second-biggest economy will slide to its lowest in more than two decades and undermine support for the ruling Communist Party during its once-a-decade power transition to a new generation of leaders later this year. The rebound in inflation, excess capacity in some industries and banks’ bad loan risks from past monetary easing highlight the potential cost of ramping up stimulus efforts.

“Politicians want a benign backdrop for their party congress gathering and slumping stock prices and a worsening growth slowdown could spoil the party,” said Lu Ting, chief China economist at Bank of America Corp. in Hong Kong. “Putting together the economic fundamentals and the timing of major political events, there will be a second round of policy easing including cuts to banks’ reserve requirements and some fiscal stimulus.”

Trade Support

Customs bureau data today may show exports rose 2.9 percent from a year earlier, according to the median estimate in a Bloomberg News survey, slumping from a 24.5 percent pace in the same month last year. Overseas shipments in July rose 1 percent as sales to European Union countries fell and growth in U.S. exports stalled.

China’s Commerce Minister Chen Deming said specific measures to support and stabilize foreign trade will be announced soon, according to an interview broadcast yesterday by China Central Television. He also said the nation’s foreign trade situation in the fourth quarter will be better than in the third.

UBS AG and ING Groep NV on Sept. 7 cut their forecasts for economic expansion this year to 7.5 percent amid a weakening global outlook and less forceful policy support than they previously expected. That would be the slowest pace since 1990.

ING lowered its estimate for China’s third-quarter growth to 7.1 percent while UBS projects a 7.3 percent pace. The economy expanded 7.6 percent in the three months through June from a year earlier, the least in three years and the sixth straight slowdown in growth.

‘Arduous Task’

Speaking to business executives at an Asia-Pacific Economic Cooperation forum in Vladivostok on Sept. 8, President Hu said China’s small and medium-sized enterprises are having a “hard time” and exporters are facing more difficulties. The government has an “arduous task of creating jobs for new entrants to the labor force.”

Hu also urged governments in the Asia-Pacific region to speed up infrastructure development, describing it as key to promoting recovery and achieving sustained and stable growth amid increasing downward risks to the global economy.

His comments followed a slew of announcements by the Chinese government approving new roads, railways and urban infrastructure that Nomura Holdings Inc. estimates have a combined value of about 1 trillion yuan ($158 billion).

The news drove the Shanghai Composite Index (SHCOMP), China’s benchmark stock gauge, 3.7 percent higher on Sept. 7, the biggest gain in eight months. The index had previously dropped 17 percent from this year’s March 2 high as cooling economic growth hurt earnings.

Inflation Accelerates

Sany Heavy Industry Co. (600031) the nation’s biggest machinery maker, jumped the most since February 2009 and Anhui Conch Cement Co., China’s largest cement maker, had its biggest gain since July 2010, on optimism demand for their products will rise.

Inflation last month accelerated to 2 percent from a year earlier, the statistics bureau said yesterday. The decline in producer prices extended into a sixth month, with a drop of 3.5 percent.

“A renewed inflationary trend could prove to be a further complication to policy makers’ growth-inflation trade-off,” said Glenn Maguire, chief economist at consultant Asia Sentry Advisory Pty Ltd. in Sydney. “China will have enormous difficulties in crafting a policy response to these divergent price and activity trends.”

The increase in August industrial production was the weakest since May 2009. Power output rose 2.7 percent from a year earlier, the statistics bureau said, compared with 2.1 percent in July. Growth in production of rolled steel slumped to 1.4 percent.

‘Weak Data’

Growth in fixed asset investment excluding rural households in the first eight months was lower than the median estimate of 20.4 percent. Retail sales rose 13.2 percent from a year earlier in August, in line with the median economist estimate.

“Such a weak series of economic activity data should now seriously alert policy makers,” said Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “The monetary policy stance will have to become more aggressive in order to arrest the rapidly deteriorating economy.”

Liu said the central bank will need to cut banks’ reserve requirement ratio by another 150 basis points this year.

Interest Rates

The central bank has held off from monetary policy loosening since July 5 when it cut interest rates for the second time in less than a month. It lowered reserve requirements three times between November and May by 50 basis points each time. The ratio now stands at 20 percent for the biggest banks.

Zhang Zhiwei, Hong Kong-based chief China economist at Nomura, said some leading indicators improved “very significantly” last month, pointing to better property and infrastructure investment in coming months.

The value of land purchased by developers rose 66 percent in August from a year earlier after falling 39 percent in July, he said. Investment in new projects gained 33 percent after a 25 percent increase the previous month, he said.

“These suggest economic momentum will pick up soon,” said Zhang, who estimates growth will rebound to above 8 percent in the fourth quarter.

--Zheng Lifei. With assistance from Ailing Tan in Singapore, Regina Tan and John Liu in Beijing and Michael Forsythe in Vladivostok. Editors: Nerys Avery, Chad Thomas

To contact the reporter on this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net.

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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