China’s Economy Expands at the Slowest Pace in Almost a Decade

By Kevin Hamlin

April 16 (Bloomberg) -- China’s gross domestic product, battered by collapsing exports, grew at the slowest pace in almost ten years, probably marking the low point for the world’s third-biggest economy.

GDP expanded 6.1 percent in the first quarter from a year earlier, after a 6.8 percent gain in the previous three months, the statistics bureau said in Beijing today. The figure compares with the 6.2 percent median estimate of 13 economists surveyed by Bloomberg News.

China’s economy shows signs that Premier Wen Jiabao’s 4 trillion yuan ($585 billion) stimulus plan is working, fueling a surge in bank lending and spurring the Shanghai Composite Index to an eight-month high. The State Council said yesterday that it will cut export taxes for some electronics products and offer cheaper credit to manufacturers to spur shipments overseas.

“The recovery is still at a very fragile stage,” said Yu Song, an economist at Goldman Sachs Group Inc. in Hong Kong. “The tug of war between upside risks from domestic investments and downside risks from weaker external demand will continue.”

Today’s report coincides with a statement from U.S. Treasury Secretary Timothy Geithner that China isn’t a currency manipulator. His stance eases pressure on China to allow its currency to rise, hurting efforts to revive exports.

From July 1 to the end of last year, the yuan rose just 0.4 percent against the dollar. Its value has been little changed since the beginning of the year, closing yesterday at 6.8325 per dollar.

Global Recessions

China’s expansion lagged behind its 9 percent growth for all of 2008 and 13 percent gain in 2007. It also contrasted with recessions in economies around the world. The Organization for Economic Cooperation and Development predicts a 6.3 percent expansion for China this year, compared with a 4 percent contraction in the U.S. and a 6.6 percent decline in Japan.

There are signs that other economies may have seen the worst. The Federal Reserve said yesterday the U.S. contraction slowed across several of the nation’s biggest regional economies last month. In Japan, economists from Morgan Stanley and Macquarie Securities Ltd. increased their GDP forecasts, saying the economy would contract less-than-expected after Prime Minister Taro Aso announced a 15.4 trillion yen ($154 billion) stimulus package.

Confidence in the global economy rose to an 11-month high, a Bloomberg survey of users on six continents showed yesterday.

Share Market Rally

The Shanghai Composite Index of stocks has climbed 39 percent this year, making it the second-best performer among 88 indexes tracked by Bloomberg.

Some of the statistics in today’s report pointed to a recovery. Industrial production expanded 8.3 percent in March, compared with 3.8 percent in the first two months. Urban fixed- asset investment climbed 30.3 percent in March.

Spending on real-estate development grew 4.1 percent in the first quarter, up from a 1 percent gain in the first two months, a report showed this week.

Companies are also reporting how the stimulus package is helping. Beijing-based General Steel Holdings Inc. said its main factory in Hancheng city, Shaanxi province, signed contracts to sell 560,000 metric tons of steel for stimulus-related projects by late March, an amount equal to 30 percent of total output last year.

Auto Sales

General Motors Corp., the biggest overseas automaker in China, raised its forecast for the nation’s auto sales this year after the government took steps to spur demand and provided subsidies in rural areas.

China’s GDP in the first quarter was pulled lower by sinking exports as a global recession cut demand for textiles and electronics, prompting thousands of factories to close and leaving more than 20 million migrant laborers without work.

“Exports will continue to drag on growth at least until the final quarter of the year,” said Mark Williams, an economist with Capital Economics in London. If there is a recovery this year, it will “be lackluster at best.”

Today’s report contrasts with a year ago when the economy expanded 10.6 percent and Premier Wen said that inflation running at more than 8 percent was the nation’s biggest problem.

Consumer prices fell 1.2 percent in March from a year earlier, compared with a drop of 1.6 percent in February.

Borrowing Costs

Cooling inflation provided the People’s Bank of China with space to lower the one-year lending rate by 216 basis points to 5.31 percent last year and reserve requirements by 2 percentage points to 15.5 percent for large banks.

The bank also lifted caps on lending toward the end of 2008. As a result, new loans jumped more than six times to 1.89 trillion yuan ($277 billion) in March from a year earlier, raising concern among some economists that the cash flowing into the economy will inflate asset bubbles, and promote wasteful spending.

“The next policy move needs to be taming credit growth and local governments’ investment drive,” said Wang Tao, an economist at UBS AG in Beijing. “This is needed to reduce the risk of massive resource misallocation, asset price bubbles and damage to the banking system.”

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