China Industrial-Output Growth Slows on Export Orders

By Nipa Piboontanasawat

Aug. 14 (Bloomberg) -- China's industrial-output growth cooled in July to the slowest pace since February 2007 on weaker export orders and factory shutdowns to clear the air for the Olympic Games.

Production rose 14.7 percent in July from a year earlier, the statistics bureau said today, after gaining 16 percent in June. That was less than the 15.9 percent median estimate of 20 economists surveyed by Bloomberg News.

China's export growth may cool further after rising 22.6 percent in the first seven months, less than the 25.7 percent gain in all of 2007. The nation needs an emergency plan to stoke investment should export demand suddenly collapse as the global economy weakens, the government's State Information Center said in a report published yesterday.

``This slowdown may indicate that export growth will be lower in coming months,'' said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong. ``Factory closures before the Olympic Games played a small part.''

The yuan fell to 6.8602 against the dollar as of 10:59 a.m. in Beijing after closing at 6.8570 yesterday.

A government-backed survey of purchasing managers suggested that manufacturing contracted last month for the first time since the data began in 2005, with an index of export orders falling to a record low. Exports unexpectedly surged 26.9 percent last month.

Beijing ordered some factories in and around the city to cut production or shut down ahead of the Games.

Disasters, Power Shortages

Export weakness and natural disasters were key factors in July's slower output growth, Zhu Baoliang, chief economist at the State Information Center, said in the government's statement.

China had the worst snowstorms in half a century in January and February, followed by the deadliest earthquake in 32 years in May and rains and floods in the nation's south this summer.

Manufacturers also face electricity shortages, with power rationed in Shandong, Hubei, Shanxi, Henan and Liaoning provinces. Shandong Xinfa Aluminum and Electricity Group, an aluminum maker, said Aug. 8 that a coal shortage is threatening power supplies for its plants.

China's economy expanded 10.1 percent in the second quarter from a year earlier, down from 11.9 percent in all of 2007.

This quarter, the government has eased bank lending quotas, raised tax rebates on exports of garments and textiles and halted gains by the yuan against the dollar, shifting emphasis to protecting jobs from fighting inflation.

The yuan has climbed more than 10 percent in the past year, making exports more expensive and less appealing.

`Tough Challenges'

``China's manufacturing sector is facing tough challenges due to the global slowdown, rising production costs, tight credit conditions, power shortages and currency appreciation,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong.

Factory closures ahead of the Olympics played a ``limited'' role in restraining July's production, Sun said.

Producer prices jumped 10 percent in July from a year earlier, the fastest pace since 1996. Wages in Chinese urban areas rose 18 percent in the first half to 12,964 yuan ($1890) Improved environmental and safety standards and higher energy prices are also pushing up costs.

Still, rising domestic demand may help sustain industrial production. Retail sales jumped 23.3 percent in July from a year earlier, the quickest gain since 1999 when Bloomberg data began.

For the first seven months of 2008, industrial production rose 16.1 percent from a year earlier, the statistics bureau said.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net