By Kevin Hamlin and Nipa Piboontanasawat
Sept. 12 (Bloomberg) -- China's industrial production grew at the slowest pace in six years on weaker export demand and factory shutdowns for the Olympics, increasing the likelihood the government will stimulate the economy.
Output rose 12.8 percent in August from a year earlier, the statistics bureau said today, after gaining 14.7 percent in July. That was less than the 14.5 percent median estimate of 22 economists surveyed by Bloomberg News.
Today's figure adds to weaker inflation and trade in signaling that the expansion of the world's fourth-biggest economy may keep slowing as growth falters in the U.S., Europe and Japan. Policy makers may cut the proportion of deposits that banks are required to set aside as reserves and maintain a slower pace of gains by the yuan to protect jobs.
``Growth concerns and moderating inflation will make the authorities more likely to cut reserve requirements and slow yuan appreciation,'' said Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. She estimates the reserve ratio will fall 50 basis points from a record 17.5 percent by year's end, dropping to 15 percent in 2009.
The yuan fell to 6.8472 against the dollar as of 3:34 p.m. in Shanghai from 6.8449 immediately before the data was released.
Of the currency's 6.7 percent gain this year against the dollar, only 0.1 percent has come this quarter, after policy makers placed extra emphasis on sustaining growth rather than cooling inflation. A stronger currency hurts exporters by pushing up the prices of their products.
Economies Weaken
China's economic expansion slowed for a fourth quarter to 10.1 percent in the three months through June. Its growth remained the fastest of the world's 20 biggest economies.
Output growth is slowing ``due to weakening external demand, domestic shortages of electricity and the Olympic Games,'' said Sun Mingchun, an economist with Lehman Brothers Holdings Inc. in Hong Kong.
Manufacturers are grappling with slowdowns in the economies of China's biggest customers. Japan's economy shrank 3 percent last quarter, the government said today. The European Commission this week predicted recessions for Germany, Spain and the U.K.
Before the Olympics, China's government restricted industrial production and construction in Beijing and surrounding provinces to reduce air pollution.
``Not surprisingly, the sectors that recorded the most significant slowing in output were the polluting, heavy industries,'' said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. ``China's industrial production is not slowing to the extent the August figures suggest.''
Steel, Cars, Iron
Production of steel products, motor vehicles and pig iron fell from a year earlier. Cement output rose 1.5 percent, down from a 6.3 percent increase in July.
Power shortages are also restraining output. Aluminum Corp. of China Ltd. and 19 of its peers signed an accord in July to reduce production by as much as 10 percent until the end of the year to ease the shortages. Electricity output growth slowed in August for the fifth straight month to 5.1 percent.
Inflation cooled to 4.9 percent last month, the slowest pace since June 2007. Money-supply growth eased, the central bank said today. Weakness in imports may partly have reflected softer demand from factories for materials.
Rising raw-material and labor costs have added to pressure on exporters of shoes, toys and clothes. In Guangdong province, an export hub, the number of toymakers fell more than 70 percent in the first seven months from a year earlier, the official Xinhua News Agency reported.
Retail Sales Climb
Still, the signs aren't all negative. Retail sales grew 23.2 percent last month, close to the fastest pace in nine years, the statistics bureau said today. While export growth slowed, the 21.1 percent increase was more than economists estimated.
Industrial-output growth will bounce back, Societe Generale's Maguire said. By comparison, India's industrial output grew only 7.1 percent in July, the government said in New Delhi today.
China's policy makers have already loosened loan quotas -- restrictions on how much banks can lend -- and raised export-tax rebates for garments and textiles. Infrastructure spending is a possible tool for stimulating economic growth.
Officials are working on a plan for as much as 400 billion yuan ($58 billion) of spending and tax cuts, according to economists and reports in domestic news media.
Besides slowing economic growth, policy makers face weakness in asset markets. The nation's property market could be headed for a ``meltdown'' as home prices and sales decline, Morgan Stanley said today. The CSI 300 Index of stocks is down 61 percent this year.
Last month's industrial-output growth was the slowest since August 2002 after excluding the distortions in January and February each year caused by China's Lunar New Year holiday.
To contact the reporter on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net
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