China's Economic Growth Cools to Slowest Since 2005

By Kevin Hamlin and Li Yanping

July 17 (Bloomberg) -- China's economy grew at the slowest pace since 2005 in the second quarter, prompting the yuan's biggest drop in seven weeks on speculation the government will slow its advance to protect exporters.

Gross domestic product rose 10.1 percent from a year earlier, down from 10.6 percent in the first quarter, as exports weakened and the government curbed lending. Consumer prices rose 7.1 percent in June, slowing from 7.7 percent in May, the statistics bureau said today in Beijing.

The yuan fell 0.2 percent against the dollar, paring a 7 percent advance this year that made it Asia's best performer. Some Chinese officials are pressing for slower currency appreciation to protect jobs as cooling global demand threatens to trigger a slump in shipments from the world's fastest-growing major economy.

``A slower pace of appreciation would mean breathing room for the export sector,'' said Jing Ulrich, JPMorgan's chairwoman of China equities.

The yuan traded at 6.8270 against the dollar as of 3:55 p.m. in Shanghai, the biggest drop since May 27.

GDP growth cooled for the fourth straight quarter. The median estimate of 18 economists surveyed by Bloomberg News was for a 10.3 percent expansion. The U.S. economy grew 2.5 percent in the first quarter.

`Orderly Slowdown'

China's growth is still the fastest of the world's 20 biggest economies and is helping to sustain the global expansion this year as a housing slump and credit-market turmoil threaten to send the U.S. into a recession.

``This is an orderly slowdown, not a dramatic one,'' said Kevin Lai, a Hong Kong-based economist with Daiwa Institute of Research.

The trade surplus for the second quarter narrowed 12 percent from a year earlier to $58.14 billion as import costs climbed and U.S. demand faltered.

Export prospects have deteriorated, with Federal Reserve Chairman Ben S. Bernanke saying this week that the U.S. faces ``significant downside risks to the outlook for growth.''

Rising prices, constraints on agricultural output, lagging rural incomes and global financial market turmoil are problems for China's economy, the statistics bureau said in a statement.

The Ministry of Commerce has urged China's cabinet to rein in currency gains and raise some export rebates, a ministry official said July 14, speaking on condition of anonymity.

`We'll Be Dead''

``We'll all be dead if the government doesn't increase tax rebates and slow the appreciation,'' Tang Zhenya, a salesman at Changshu Shengtian Knitting & Clothing Co. in Jiangsu province said yesterday.

Most textile companies were unprofitable in the first five months of the year, Du Yuzhou, President of China Chamber of Commerce for Import and Export of Textiles said at an industry conference in Shanghai.

As many as 45 million workers earn their livings in export- oriented sectors, according to Jonathan Anderson, a Hong Kong- based economist with UBS AG. He cites government surveys.

Inflation has eased from February's 12-year high of 8.7 percent on smaller gains in food prices. It remains above the central bank's 4.8 percent annual target and rising commodity costs may keep prices elevated.

Producer-Price Inflation

Producer prices climbed 8.8 percent in June from a year earlier, the statistics bureau said today, after rising 8.2 percent in May. That is the fastest pace since Bloomberg data began in 1999.

``The high producer-prices number points to the potential risk of inflation in the coming months,'' said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong. ``Inflation is still way above the official target so a tight policy will continue.''

Besides using the currency to cool inflation, China has imposed lending quotas and ordered banks to set aside a record 17.5 percent of deposits as reserves to soak up cash flooding the economy from trade, foreign direct investment and investors betting on gains by the yuan. The central bank hasn't raised interest rates this year to avoid attracting capital inflows.

Standard Chartered Bank Plc today cut its forecast for four interest-rate increases this year to none and said policy makers' next move will be to cut rates in 2009.

Retail Sales Soar

Government efforts to boost consumption at home may be paying off. Retail sales rose 23 percent in June from a year earlier, the fastest pace since at least 1999. Urban disposable incomes rose 14.4 percent to 8065 yuan for the first half from a year earlier. Rural cash incomes climbed 19.8 percent to 2528 yuan.

``The surprising thing is the strength of the domestic economy,'' said Paul Cavey, an economist with Macquarie Securities Ltd. in Hong Kong. ``Consumers still have a lot of cash and in that sense it's difficult to be too pessimistic about the domestic economy.''

Investment jumped amid rebuilding after the Sichuan earthquake in May. Urban fixed-asset investment surged 26.8 percent in the first half from a year earlier, the statistics bureau said, after climbing 25.6 percent in the first five months.

``They can keep the economy growing at 10 percent even if there is a sharp slowdown elsewhere in the world,'' said Julian Jessop, an economist with Capital Economics Ltd. in London, citing the government's ability to boost spending.

To contact the reporters on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net; Li Yanping in Beijing at yli16@bloomberg.net