China's Industrial Slump Speeds Up

The Age

Tuesday December 16, 2008

JOHN GARNAUT, BEIJING

CHINA'S industrial output has slumped to a new low, as leading economists say China's previously irrepressible economy is probably shrinking this quarter and will contract again in the first quarter of next year.

Industrial production, one of the most closely watched economic indicators, grew just 5.4per cent over the year to November - implying a sharp contraction since mid-year, when the annual number was running at 17 per cent.

Electricity production was down by 9.6 per cent over the year, which analysts say is the sharpest slump in 30 years of economic reform.

The accelerating industrial downturn comes despite a partial rebound in steel output, as steel makers and downstream users appear to have finished the process of liquidating stocks. "GDP this quarter must be contracting, everything is pretty bad," said Macquarie Bank's China economist, Paul Cavey.

"And we're not at the worst point yet."

Mr Cavey said industrial production might have reached its nadir but he was most concerned about a precipitous fall in construction, which had previously been a key force in the economy.

"Real estate construction is currently contracting by 20 per cent year-on-year and by early next year it will be 30 per cent," he said.

Top Chinese leaders and regulators are beginning to talk candidly and sometimes alarmingly about the risks ahead.

"China's economic and financial situation merits no optimism and Chinese banks will face stern challenges in 2009," China's top banking regulator, Liu Mingkang, told a weekend conference in Beijing.

"The possibility of moving to deflation from inflation has greatly increased."

Most economists expect the Chinese economy will bottom in the first half of next year and revive in the second half, when the Government's all-out fiscal and monetary stimulus policies take hold and investors are expected to wade back into real estate.

In the meantime, retail spending and some trade data offer a glimmer of optimism.

Export growth fell 2 per cent in the year to November and is expected to fall much further over coming months.

But net exports, which count for GDP calculations, are probably still growing because exports were overshadowed by a larger contraction in imports.

The trade surplus, which is measured in terms of value rather than volumes, hit a record last month.

The precipitous fall in commodity prices that is slashing Australia's national income is having a mirror effect in China.

Mr Cavey calculates that if iron ore and oil prices fall to their 2004 levels, then it will slash $US100 billion ($A150billion) off China's import bills without any change in import volumes, adding to China's purchasing power.

And China's official retail spending figures are still posting annual growth of 20 per cent, thanks to a sharp rise in real wages (magnified by falling inflation).

But sales of large consumption items have stumbled.

China's car industry association said sales of passenger vehicles fell 10 per cent in the year to November.

Truck sales are expected to be worse, after a 25 per cent fall in medium and heavy truck sales in the year to October.

Yesterday the domestic media reported big production cuts in cars and trucks, which were denied by the companies involved.

Volkswagen's joint-venture factories in Shanghai and Changchun both told The Age that production cuts were due to regular maintenance rather than the deteriorating market.

"This has nothing to do with the financial tsunami," said a spokesman at Shanghai Volkswagen.

John Bonnell, director of forecasting at J.D.Power & Associates, predicts a small decline in car sales next year.

"We expect the sheer will of government to boost things will eventually have some impact," he said.

"But it's an assumption more than a conviction."

© 2008 The Age

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