China Industrial-Output Growth Slows on Exports, Olympic Curbs

By Nipa Piboontanasawat

Aug. 14 (Bloomberg) -- China's industrial production grew at 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.

``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.''

Weakness in economies around the world pared orders for goods, while higher fuel and raw-material prices deterred some companies from expanding. The slowdown, exacerbated by attempts to prevent pollution in Beijing during the Olympics, suggests an acceleration in China's July export growth is unlikely to be sustained.

The yuan fell to 6.8613 against the dollar as of 2:36 p.m. in Beijing after closing at 6.8570 yesterday.

The nation needs an emergency plan to stoke investment should export demand suddenly collapse as global growth weakens, the government's State Information Center said in a report published yesterday.

Germany's economy contracted for the first time in almost four years in the second quarter, a report today showed. Japan's shrank too, bringing the country to the brink of a recession, according to a report yesterday.

Stronger Currency

A government-backed survey of purchasing managers published Aug. 1 suggested that manufacturing in China 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.

Export weakness played a key role in July's output slowdown, Zhu Baoliang, chief economist at the State Information Center, said in the government statement, citing a stronger Chinese currency and the cooling of the global economy as factors. The yuan has climbed more than 10 percent in the past year, making China's exports more expensive and less appealing abroad.

Higher costs, including those of oil and iron ore, have restrained output and some companies in the electricity, steel and automobile industries are ``in difficulty'' and unwilling to produce, Zhu said.

Power is being 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.

Aluminum Production Cuts

Aluminum Corp. of China Ltd., the nation's largest producer of the metal, and 19 other smelters agreed to cut production by as much as 10 percent for at least three months from July to ease power shortages.

Textile output rose 10 percent in July from a year earlier after gaining 12.4 percent in June. Steel products growth weakened to 7 percent from 11 percent. Cement output rose 6.3 percent, down from 7.9 percent.

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.

`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). Tighter environmental and safety rules 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