China Economic Growth May Cool to Slowest in Almost 10 Years

By Kevin Hamlin

April 14 (Bloomberg) -- China’s economic growth probably cooled to the slowest in almost 10 years in the first quarter, marking the trough of a slump brought on by a collapse in exports amid a global recession.

Gross domestic product grew 6.3 percent from a year earlier, according to the median estimate of 12 economists surveyed by Bloomberg News, down from 6.8 percent the previous three months. The report is due April 16.

China is battling the worst global recession since World War II with a 4 trillion yuan ($585 billion) stimulus plan that spurred the first increase in manufacturing in six months and a surge in bank lending. The benchmark Shanghai Composite Index yesterday rose to an eight-month high after Premier Wen Jiabao said the economy showed better-than-expected growth, citing rising investment in fixed assets and consumer demand.

“Recovery is a high certainty now,” said Tao Dong, chief Asia economist at Credit Suisse AG in Hong Kong. “Infrastructure investment remains at full speed, bank lending reaccelerated in March and property transaction volumes have surged across the country.”

The World Bank, the Asian Development Bank and the Organization for Economic Cooperation and Development all see signs the stimulus is working and predict that GDP will begin to increase at a faster pace again in the second half.

Signs of Recovery

Signs of recovery include an increase in automobile sales to a record 1.08 million vehicles in March, a government-backed index showing manufacturing expanded for the first time in six months, and an acceleration in first-quarter property investment to 4.1 percent in the first quarter from 1 percent in the first two months of the year.

“Whether the economy can accelerate from this point is unclear, but it certainly seems to have stabilized,” said Stephen Green, head of China research at Standard Chartered Plc in Shanghai.

The economy still has to weather the effects of a collapse in exports, which fell for a fifth month in March. Steel prices have dropped this year and industrial profits slumped 37 percent in January and February combined, the first decline since records began in February 2007. The OECD forecasts world trade will contract 13 percent this year.

More than 20 million jobs have already been lost, and the Asian development Bank estimates that even with economic growth of 7 percent, the stimulus spending would only create about 9 million jobs.

Export Decline

“The trend decline in exports is unbroken,” said James McCormack, head of Asia sovereign ratings at Fitch Ratings in Hong Kong. “Chinese gross domestic product growth will remain below potential until the global economy recovers.”

China’s stimulus package is focused on infrastructure projects such as a new high-speed rail link between Shanghai and Nanjing, and the Xiamen-Zhangzhou cross-sea bridge.

That’s led to concern that the government wasn’t doing enough to encourage its people to spend the money they save to pay for medical expenses or retirement. Consumer spending represents about 35 percent of China’s GDP compared with more than two-thirds in the U.S.

The government has “room to do more” to improve health, education and social security to boost incomes, the World Bank said last month.

In recent weeks the government has moved to increase confidence and to expand the social safety net. The State Council this month announced an 850 billion yuan health-care plan, including building at least one hospital in every county and expanding medical insurance coverage to 90 percent of the 1.3-billion population by 2011.

Rural Consumption

China this year is spending 20 billion yuan to subsidize purchases of televisions and refrigerators in rural areas and plans to increase spending on welfare by 29 percent.

Premier Wen Jiabao said April 11 that China will “closely” monitor changes in the domestic and world economy and “hammer out” new response plans when needed.

The central bank on April 13 pledged to provide “ample liquidity” to ensure money supply and loan growth meet economic development needs.

Easing inflation also gives policymakers room to introduce more support measures.

Consumer prices probably fell 1.3 percent in March after dropping 1.6 percent in February, another Bloomberg survey showed. Producer prices declined 5.8 percent, a steeper contraction than the 4.5 percent the month earlier, the survey showed.

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