China’s Economic Slowdown Is Deepening, Officials Say

By Li Yanping and Lee Spears

Dec. 12 (Bloomberg) -- China’s economic slowdown is deepening, with overcapacity in almost all industries, and won’t bottom out until after the first quarter of next year, two senior officials said today.

“The international financial crisis is having a severe domestic impact,” Li Yizhong, head of the Ministry of Industry and Information Technology, said at a press briefing in Beijing. “We don’t think we’ve bottomed out yet, and the impact will broaden further in December.”

Exports fell for the first time in seven years last month, imports plunged and manufacturing contracted by a record as the global recession pushed the world’s fourth-biggest economy into a slump. The slowdown will deepen before a 4 trillion yuan ($585 billion) stimulus package kicks in from the second quarter of next year, Liu He, a senior economic policy official, said at a conference in Beijing.

Stocks fell the most in three weeks after the cautions and the weakest retail-sales figures in nine months. The CSI 300 Index declined 4.2 percent.

China will support nine industries, including steel, telecommunications and automotive by cutting taxes, offering subsidies for technological upgrades and helping smaller companies get credit, Li, the industry minister, said.

China’s industrial-production growth cooled in October to 8.2 percent, the weakest pace in seven years.

Industrial Production

Li echoed a warning from Fan Gang, an adviser to the People’s Bank of China, that the November number, due to be released Dec. 15, will be worse.

China may help steelmakers hurt by weaker demand for automobiles and electric appliances by purchasing steel stockpiles, offering subsidies for plant upgrades and increasing export-tax rebates, Li said.

“Just about every industry” has overcapacity, he said.

China’s growth has slowed for five quarters. The economy expanded 9 percent in the third quarter, the least in five years. The World Bank forecasts the economy will expand 7.5 percent next year, which would be the slowest pace in almost two decades.

Policy makers shouldn’t use the nation’s exchange rate to boost exports, David Dollar, the World Bank’s country director for China, said today.

Exchange Rate

Exports are falling “because of shrinking global demand and the exchange rate is not the problem,” he said at a conference in Beijing.

The yuan closed at 6.8427 against the dollar for its biggest weekly advance since August, a 0.6 percent gain.

China’s slowdown will deepen in the first quarter of next year as companies run down inventory, said Liu, vice minister of the Central Leading Group on Financial and Economic Affairs.

“China’s economy may grow at a rather low level in the first quarter,” he said. “Many companies were overoptimistic about the economic cycle, so they built up a lot of inventory and now they have to digest that.”

The government said this week that sustaining growth will be its top priority in 2009.

The central bank cut the key lending rate by the most in 11 years on Nov. 26, two weeks after Premier Wen Jiabao announced the stimulus package and the nation adopted a “moderately loose” monetary policy.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net