China GDP Growth May Cool to Slowest Pace in 7 Years

By Kevin Hamlin

Jan. 19 (Bloomberg) -- China’s economy may have expanded at the slowest pace in seven years in the fourth quarter as exports collapsed, adding to pressure for more stimulus measures and undermining growth across Asia.

Gross domestic product grew 6.8 percent from a year earlier, according to the median estimate of 12 economists surveyed by Bloomberg News, down from 9 percent in the previous three months. The data is due to be released this week.

Premier Wen Jiabao has pledged more measures after unveiling a 4 trillion yuan ($585 billion) package in November and the central bank may add to five interest-rate cuts since September. Plummeting Chinese demand for parts and materials for exports is reverberating across Asia, driving Taiwan and South Korea closer to recessions and worsening Japan’s economic slump.

“China’s era of hyper-growth is coming to a sudden, very disruptive end,” said Kevin Lai, an economist with the Daiwa Institute of Research in Hong Kong. “China’s imports are slumping dramatically and the rest of Asia relies on it very significantly.”

Lai expects the key one-year lending rate to decline to 4.50 percent from 5.31 percent by the middle of the year. He also sees reduced reserve requirements for banks.

After vaulting past Germany to become the world’s third- biggest economy in 2007, China may this year face its first drop in shipments since at least 1990.

Sharper Slowdown

The slowdown from the previous three months would be the sharpest since quarterly data began in 1994. The pace compares with 13 percent growth in 2007. Morgan Stanley cut yesterday its forecast for this year’s expansion to 5.5 percent.

Easing inflation gives room for more rate reductions.

Consumer-price inflation may have cooled to 1.6 percent in December from a 12-year high of 8.7 percent in February, a second survey showed. Producer prices fell 0.1 percent, the first drop since 2002, economists estimated.

Besides the export slowdown, slumps in stocks and property are undermining consumer confidence and growth.

“Exports are not going to recover any time soon and the property market is struggling,” said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong. “More easing is needed because demand won’t return in a hurry.”

Exports will decline 6 percent this year, down from a 17.2 percent gain in 2008, Fitch Ratings said Jan. 16. The central bank has helped exporters by halting the yuan’s gains against the dollar over the past six months.

Asia’s Losers

Among the biggest losers from China’s waning demand are Taiwan, which shipped almost 36 percent of its exports to China in 2007; South Korea, which sent 25 percent; and Japan, which shipped 19 percent, according to UBS AG.

Goldman Sachs Group Inc. forecasts the South Korean economy will contract this year, its first recession since the 1997-1998 Asian financial crisis. Taiwan probably slipped into a recession in the fourth quarter, its government said.

China’s imports from Taiwan fell 44.3 percent in December. Shipments from Korea declined 30 percent and those from Japan dropped by 15.4 percent. Exports were 2.8 percent lower, the biggest decline in almost a decade.

At home, as many as 4 million migrant workers lost their jobs last year as factories closed and that figure is likely to jump another 5 million in 2009, Credit Suisse AG estimates.

Social Stability

Social stability “is clearly an issue,” James McCormack, the Hong Kong-based head of Asian sovereign ratings for Fitch, said Jan. 16. “There is a question of how easy it is to redeploy millions or tens of millions of unemployed factory workers to infrastructure construction products that may be located elsewhere in the country.”

The CSI 300 Index of stocks has fallen 62 percent since the beginning of last year. House prices across 70 cities dropped for the first time on record in December and construction will contract 30 percent this year, according to an estimate by Hong Kong-based Macquarie Securities property analyst Eva Lee.

China Vanke Co., the nation’s biggest real-estate developer, said last year that the housing market was “in recession” as sales and profits fell.

The economy may grow 6 percent this year, the least since 1990, according to Fitch.

Still, there are signs that a revival is possible. Bank lending and money supply jumped more than economists estimated in December as money flowed into infrastructure projects.

The nation’s arsenal for fighting the global recession spans a world-record $1.95 trillion of currency reserves and state control of the biggest banks.

To contact the reporter on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net;