China's Economic Growth Probably Slowed on Exports

By Nipa Piboontanasawat

July 15 (Bloomberg) -- China's economic expansion probably slowed for a fourth straight quarter as exports cooled, raising the possibility that the government will switch focus to sustaining growth from fighting inflation.

Gross domestic product grew 10.3 percent in the second quarter from a year earlier, according to the median estimate of 18 economists surveyed by Bloomberg News, after gaining 10.6 percent in the previous three months. June's inflation may have eased to 7.3 percent from 7.7 percent in May.

Premier Wen Jiabao pledged this month efforts to maintain ``sound and fast'' economic growth and Chinese leaders visited exporters to hear their concerns. Policies to stimulate the economy and to help domestic manufacturers, such as slowing the yuan's appreciation and deferring interest-rate increases, would risk fanning inflation just as price gains begin to slow.

``Policy makers are increasingly worried about the threats to economic growth,'' said Peng Wensheng, head of China research at Barclays Capital in Hong Kong. ``Inflation is not the only priority -- they definitely don't want to see growth sliding to below 10 percent.''

The GDP announcement is due July 17 in Beijing. China's economy may expand 10.1 percent this year, down from the 11.9 percent growth in 2007 that was the fastest in 13 years, the survey showed. Inflation has slowed this quarter from a 12-year high in February on smaller food-price gains.

`Crunch Time'

To cool prices, the government has let the yuan gain 6.7 percent versus the U.S. dollar this year, cutting import costs. It has also imposed lending quotas and ordered banks to set aside a record 17.5 percent of deposits as reserves. It hasn't raised interest rates, to avoid attracting overseas capital to an economy flooded with cash.

``It's crunch time for decisions on monetary policy,'' said Stephen Green, the Shanghai-based head of China research for Standard Chartered Bank Plc. ``But loosening could see inflation sweeping back as a bigger problem next year.''

Export growth slowed to 21.9 percent in the first half from 25.7 percent in all of 2007. Leaders at the Group of Eight summit warned last week that climbing food and oil prices threaten global economic growth, forecast by the World Bank to slow to 2.7 percent in 2008 from 3.7 percent last year.

The Ministry of Commerce has suggested China's cabinet slow the pace of the yuan's gains and increase some export rebates to help exporters as global demand falters, an official who declined to be named said yesterday.

Policy Priorities

Chinese leaders' rhetoric ``suggests inflation is slipping down the list of policy priorities,'' said Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong. Weakening exports ``threaten to curtail the pace of yuan appreciation and may even lead to a reversal of some recent credit-rationing initiatives,'' Maguire said.

Black Peony (Group) Co., a jeans and cotton-cloth exporter in Jiangsu province, forecasts a six-month loss because of the yuan's gains, reduced export incentives and higher costs.

Manufacturers face rising commodity prices and power shortages. Producer prices may have jumped 8.5 percent last month, the fastest pace since Bloomberg data began in 1999 and quicker than the pace of inflation, according to the survey.

The government ``has little room to ease monetary policy'' because it needs to raise energy prices again to encourage fuel and power production, said Liang Hong, a Hong Kong-based economist with Goldman Sachs Group Inc. China increased fuel and electricity prices last month.

Company Profit

Profit growth at Chinese industrial companies slowed in the first five months to half the pace of a year earlier on record oil and coal prices.

Still, investment, the main driver of the world's fastest- growing major economy, is staying close to last year's pace. Urban fixed-assed spending may have climbed 25.4 percent in the first half, after increasing 25.8 percent for all of 2007, the survey showed.

Retail sales may have climbed 21.3 percent in June from a year earlier, after rising 21.6 percent in May.

The following table shows economists' estimates of economic growth in the second quarter and in 2008 from a year earlier.

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                                 2Q      2008
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Median                         10.3%     10.1%
Average                        10.2%     10.1%
High                           10.9%     10.5%
Low                             9.0%      9.7%
Number of Estimates               18         9
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BNP Paribas                    10.2%     10.1%
Bank of China (Hong Kong)      10.0%     10.0%
CFC Seymour                    10.2%     10.0%
Citic Ka Wah Bank              10.4%     10.2%
Daiwa Institute of Research    10.6%        --
Deutsche Bank                  10.5%        --
High Frequency Economics        9.0%        --
HSBC                            9.9%      9.7%
Industrial Bank                10.9%     10.4%
ING Groep NV                   10.5%     10.5%
JPMorgan Chase                 10.1%        --
Lehman Brothers                10.1%        --
Macroecon Global Advisors       9.5%        --
Mitsubishi UFJ Securities      10.6%        --
Moody's Economy.com            10.3%     10.0%
Natixis                        10.3%     10.3%
Okasan Securities              10.5%        --
Royal Bank of Scotland         10.2%        --
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To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net