China Faces `Formidable Challenge' as Economy Weakens

By Nipa Piboontanasawat and Li Yanping

Nov. 14 (Bloomberg) -- China faces a ``formidable challenge'' to prevent a slump in the world's fourth-biggest economy, the government warned today as cooling factory and property investment signaled a deepening slowdown.

A ``severe situation at home and abroad'' and past policies to prevent overheating have undermined growth, Mu Hong, a top planning official, said at a briefing in Beijing.

Export growth and inflation slowed in October, industrial production rose by the least in seven years and money supply expanded by the least since 2005, reports showed this week. The government may cut interest rates for the fourth time in two months after announcing a $586 billion spending package on Nov. 9 to sustain growth.

``We expect them to ease monetary policy again imminently,'' said Tim Condon, head of Asia research at ING Groep NV in Singapore. ``They are clearly engaged in an ongoing process of policy easing to promote growth.''

Fixed-asset investment in urban areas rose 27.2 percent in the first 10 months from a year earlier, the statistics bureau said today, less than the 27.6 percent gain through September. The figures indicate a 24.3 percent increase in October, down from 28.7 percent in September, according to Royal Bank of Scotland Plc.

The yuan traded at 6.8293 against the dollar as of 3:18 p.m. in Beijing from 6.8300 immediately before the announcement. The CSI 300 Index of stocks rose 3.7 percent for its biggest weekly gain since April, on speculation the central bank may cut rates.

Economic Slowdown

China's economy expanded 9 percent in the third quarter from a year earlier, the slowest pace since 2003, as export demand and property slumped. This quarter's growth may be 5.8 percent, according to Credit Suisse AG.

Spending on real-estate development cooled, today's figures showed, rising 24.6 percent in the first 10 months from a year earlier after gaining 26.5 percent through September. Prices and sales are falling in major cities and construction contracted in September by the most since the 1990s, according to Macquarie Securities Ltd.

``Looking at the October data as a whole, it's clear that China's economy is slowing but there is nothing to panic about; we are still the world's fastest-growing economy,'' said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.

Export orders fell last month to the lowest level since 2005, a government survey showed previously. Import, export and retail-sales growth cooled and inflation eased to the slowest pace in 17 months.

Deflation Risk

In the first half of the year, China had a ``tight'' monetary policy and the government tried to cool investment and tame inflation that had climbed to a 12-year high.

Now, it is stoking spending, cutting interest rates and focusing on the risk of falling prices.

``The threat of inflation has basically vanished,'' People's Bank of China Vice Governor Yi Gang said at today's briefing. The government aims to ``avoid potential deflation, allow reasonable growth in money supply and loans and ensure stable economic growth.''

He added that China will ``actively participate'' in rescue efforts to counter the global financial crisis, saying that possible methods included bilateral currency swaps and working with the International Monetary Fund.

Social Stability

The central bank reduced rates for the first time in six years in September as the global credit crisis worsened. Two cuts since then have pulled the key one-year lending rate down to 6.66 percent.

``We don't want to see economic growth slow down too rapidly because that will have a serious impact on productivity, will make a recovery harder and will harm social stability,'' said Mu, a vice chairman of the National Development and Reform Commission.

He reiterated the need to boost consumption and described the nation's ``economic fundamentals'' as healthy.

``We have a market of 1.3 billion people which has great potential and we also have great potential to boost investment and consumption,'' Mu said. ``We still have large room to maneuver to ramp up domestic demand.''

The nation's spending plan through 2010 spans housing, rural development, railroads, power grids and rebuilding after May's earthquake in Sichuan province. It also allows tax deductions for purchases of machinery to stimulate investment.

On Nov. 12, the government announced the investment of at least $27 billion in six energy projects, including a natural gas link and nuclear power plants.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net; Li Yanping in Beijing at yli16@bloomberg.net