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China slowdown worsens as factory output sputters

Publication Date : 10-08-2012

 

Despite a flurry of state projects, China failed to reverse its slowdown in July, as factory output weakened to the lowest level seen in three years, while two other growth drivers, retail sales and fixed asset investments, also missed market forecasts.

The dismal data raised expectations that Beijing would ramp up efforts to boost an economy that has slid for six straight quarters.

"An economic recovery is widely expected in the second half of this year, but it has not yet arrived," noted Capital Economics analyst Mark Williams. "Stimulus efforts are feeding a pick-up in infrastructure investment, but the recovery has not so far spread to the rest of the economy."

Recently, Chinese media reported stimulus plans by local governments, estimated at 4 trillion yuan (US$632 billion), amid growing pressure to maintain stability ahead of a top leadership transition later this year.

In the past two months alone, 24 cities and provinces have started projects worth an estimated 500 billion yuan, according to the official China Securities Journal.

Unlike the 4 trillion yuan stimulus programme led by the central government in the 2008 economic crisis, this round of spending has raised doubts as the local authorities might not have the money to fund the plans or stretch them out over many years, say analysts.

Meanwhile, more Chinese consumers and companies are holding back on spending or investing during the downturn.

Retail sales growth, the strongest driver of China's growth in the first quarter, slowed to 13.1 per cent, falling short of the 13.7 per cent forecast.

Industrial output growth weakened to 9.2 per cent last month, dropping below the 9.8 per cent forecast in a Reuters poll, as factories received fewer orders.

Also, producer prices fell last month by a greater-than-expected 2.9 per cent - the fifth straight month of declines - which indicated that firms were capping their capital spending.

Investment in fixed assets such as real estate and infrastructure saw growth hover at 20.4 per cent from January to last month, just shy of the 20.5 per cent forecast.

Yesterday, the data prompted Barclays Capital to cut its gross domestic product (GDP) growth forecast for China this year to 7.9 per cent from 8.1 per cent.

In India too, several economists cut their full-year forecasts, to around 5.5 per cent, the slowest rate in 10 years, as factory output shrank by 1.8 per cent.

So Asia's two powerhouses are now under pressure to ease policy and support growth.

Analysts such as Wanbo Economic Academy director Teng Tai expect more interest rate cuts to be made, to encourage loans for businesses and counter China's key problem of "insufficient demand" at home and abroad.

HSBC economist Sun Junwei expects a "modest growth recovery in the coming quarters" as these measures and others kick in.

Meanwhile, fearful of exacerbating the slowdown, Beijing has reportedly postponed a plan to take up to half of the earnings of state-owned firms.

These state giants - which saw their combined profits shrink by 11.6 per cent to 1.02 trillion yuan in the first half - argued that such a move would hurt growth, reported Reuters yesterday.

 

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