China Economic Growth Eases to 10.3% on Credit Curbs (Update3)

By Bloomberg News

July 15 (Bloomberg) -- 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 of stocks slid the most in two weeks, leading declines across Asia 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.]

JPMorgan Chase & Co. cut its full-year growth estimate for China to 10 percent from 10.8 percent and Royal Bank of Scotland also made a reduction.

Less Than Estimates

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. In the U.S., industrial production probably fell in June for the first time in a year, a separate survey indicated ahead of a report due today.

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 Slide

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 1 percent as of 4 p.m. in Tokyo. Twelve-month non-deliverable yuan forwards slid 0.1 percent. The Shanghai Composite Index closed 1.9 percent lower, extending this year’s decline to 26 percent.

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

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.

‘Solid’ Growth

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.

China’s export gains may have prevented a deeper slowdown, 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 said today 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.

Investment Slowdown

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 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 have reduced the need. It’s now yet clear how floods in southern China may affect the grain harvest and food prices, Shen added.

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.

“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.

--Li Yanping. With assistance from Jay Wang, Sophie Leung, Zhang Dingmin and Chinmei Sung. Editors: Paul Panckhurst, Chris Anstey.

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net