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China’s Growth Eases to 11.1% in First Half From Year Earlier


China’s economic expansion eased to 10.3 percent in the second quarter and industrial production cooled more than forecast in June, signaling a deeper second- half slowdown that may add to risks for the global economy.

The gain in gross domestic product was less than an 11.9 percent increase in January-March from a year earlier. Inflation cooled to 2.9 percent in June, the statistics bureau also reported in Beijing today. Industrial output rose 13.7 percent, less than all but one of 27 forecasts in a Bloomberg News survey.

The figures signal a diminishing risk of economic overheating and give Premier Wen Jiabao more room to scale back restrictions on bank lending or property purchases by year-end. The Shanghai Composite Index and stocks across Asia declined as weaker growth in China added to European budget cuts and limited American job gains in clouding prospects for the world recovery.

“There’s no more tightening happening in China” given the slowing expansion, said Stephen Green, head of China research for Standard Chartered Bank in Shanghai. Policy makers may loosen some real-estate curbs and approve more infrastructure and investment projects in the fourth quarter as growth slows toward 7 percent before picking up into 2011, he said.

Second-quarter growth was less than the median 10.5 percent estimate in a Bloomberg News survey of 28 economists. The moderation follows the government’s success in tempering credit expansion, investment spending and property speculation.

‘Biggest Worry’

Baoshan Iron & Steel Co., the biggest publicly traded Chinese steelmaker, cut prices this week, highlighting the weakness in industrial output that Credit Suisse AG. economist Tao Dong described as the “biggest worry” from today’s numbers.

Analysts’ forecasts had indicated June inflation of 3.3 percent and industrial production growth of 15.1 percent. In May, consumer prices rose 3.1 percent, the fastest pace in 19 months.

Stocks in China and across Asia have retreated the past two months in part on concern that Chinese tightening measures — including guidance to banks to curb lending and tougher mortgage lending rules — may be excessive.

The MSCI Asia Pacific Index fell 0.7 percent as of 12:09 p.m. in Hong Kong. Twelve-month non-deliverable yuan forwards declined 0.1 percent. The Shanghai Composite Index, down 25 percent this year, slid 0.4 percent as of an 11:30 a.m. local time break in trading.

Some of today’s numbers, including inflation and investment growth, matched “rumors” reported this week by the 21 Century Business Herald newspaper.

Lending Quotas

The government may by year-end move to bolster spending by loosening quotas limiting bank lending, according to Nomura Holdings Inc. and Morgan Stanley. Credit Agricole CIB said July 12 that “modest” extra fiscal stimulus is possible.

China’s central bank sold three-year bills at a lower yield for the first time in six weeks today, suggesting that officials favor policies to support the economy as growth slows.

A leading economic index for China rose 0.8 percent to 145.8 in May, The Conference Board said today. The indicator signals “solid but less robust growth in the second half,” said Bill Adams, a Beijing-based economist for the research organization.

China remains the fastest-growing among the world’s biggest economies. U.S. GDP rose 2.4 percent in the first quarter from a year before. Companies from Komatsu Ltd., the world’s second- largest maker of construction equipment, to Honda Motor Co., Japan’s second-largest carmaker, are counting on sales in China to help drive earnings.

Export Gains

YUM! Brands Inc. Chief Executive Officer David Novak said two days ago on CNBC the company that owns KFC and Taco Bell restaurant chains “is going long in China.”

China’s export gains may have prevented a deeper slowdown in GDP in the second quarter, a support that may wane as the nation’s currency strengthens, European policy makers implement budget cuts and America’s unemployment rate hovers above 9 percent. China last month eliminated the yuan’s peg to the dollar, allowing gains for the first time since July 2008.

Statistics bureau spokesman Sheng Laiyun told reporters at today’s briefing that property curbs have yet to affect the real economy and indicated that Europe’s debt crisis may have a bigger effect on exports in the second half.

Urban fixed-asset investment gained 25.5 percent in the first six months of 2010 from a year earlier, the statistics bureau said in today’s statement. The pace compares with a 33.6 percent increase in the first half of 2009, when a 4 trillion yuan fiscal stimulus program was kicking in.

Retail Sales

Retail sales rose 18.3 percent in June from a year earlier, the bureau said. Producer-price inflation cooled to 6.4 percent. Industrial output growth was the weakest since September excluding January and February numbers distorted by a Lunar New Year holiday.

Consumer-price inflation may peak at about 4 percent this month and slow for the rest of the year, the official Shanghai Securities News reported July 12, citing government economist Zhu Baoliang.

Nomura economist Tomo Kinoshita said the central bank may raise interest rates this year, even as the expansion moderates, to remedy so-called negative real rates. With inflation outstripping the 2.25 percent return on one-year deposits, savers are losing spending power.

Inflation Risks

In contrast, Barclays Capital abandoned today a forecast for China to raise rates this year, citing diminished inflation risks. Likewise, Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. said this week that easing price pressures reduced the need for higher rates.

One uncertainty is the effect that floods in southern China could have on the grain harvest and food prices, Shen added. Wages are also rising as local governments boost minimum pay and after labor unrest affected production by companies including Honda and Toyota Motor Corp.

China’s growth will keep slowing partly because comparisons will be with levels that rose steadily in 2009 as the economy recovered from the effects of the global financial crisis, analysts’ forecasts show. Fourth-quarter growth may be 8.5 percent, UBS AG says.

Stephen Roach, the chairman of Morgan Stanley in Asia, told Bloomberg Television yesterday that “the exit growth rate for China this year will probably be in the 8 to 9 percent area, which is an excellent result.”

“It’s a moderation, stupid!” was the heading on a note this month from Australia & New Zealand Banking Group Ltd. economist Liu Li-Gang, who argued that “fears of a sharp slowdown are vastly overstated.”

Infrastructure Projects

One reason, according to Liu, is that infrastructure projects started under the stimulus program expiring this year will take three to five years to complete. He said today that “overheating risks have eased.”

China’s economy will overtake Japan’s as the world’s second biggest this year and the Organization for Economic Cooperation and Development said in March that it may account for a third of global growth. So far, the government has cooled the economy by targeting a 22 percent reduction in new loans this year to 7.5 trillion yuan, raising lenders’ reserve requirements and selling bills to soak up cash.

A clampdown on speculative real-estate purchases, via rules for buyers, developers and lenders, triggered the first month- on-month fall in property prices in more than a year in June. In industry, policy makers have tightened controls on the expansions of businesses that are heavy energy users and polluters.