Sept. 12 (Bloomberg) -- China's industrial production grew at the slowest pace in six years on weaker export demand, power shortages and factory shutdowns during the Olympic Games.

Production rose 12.8 percent in August from a year earlier, the statistics bureau said today, after gaining 14.7 percent in July. That was less than the 14.5 percent median estimate of 22 economists surveyed by Bloomberg News.

Today's figure adds to weaker inflation and trade in signaling that the world's fourth-biggest economy may be cooling further after four quarters of slowing growth. Policy makers may cut the proportion of deposits that banks are required to set aside as reserves and maintain a slower pace of gains by the yuan to protect jobs.

``Growth concerns and moderating inflation will make the authorities more likely to cut reserve requirements and slow yuan appreciation,'' said Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. She estimates the reserve ratio will fall 50 basis points from a record 17.5 percent by year's end, dropping to 15 percent in 2009.

Of the yuan's 6.7 percent gain this year against the dollar, only 0.1 percent has come this quarter, after policy makers shifted in July to placing extra emphasis on sustaining growth rather than cooling inflation. A stronger currency hurts exporters by pushing up the prices of their products.

European Economies Weaken

Manufacturers are grappling with slowdowns in the economies of China's biggest customers. On Sept. 10, the European Commission cut its 2008 growth forecast for the euro area to 1.3 percent from 1.7 percent and signaled the 2009 estimate may also be cut. It predicted recessions for Germany, the region's largest economy, Spain and the U.K.

``The trend is down due to weakening external demand, domestic shortages of electricity and the Olympic Games,'' said Sun Mingchun, an economist with Lehman Brothers Holdings Inc. in Hong Kong.

Factory production was restricted in and around Beijing last month to clear the air for the Olympics. China is also facing its sixth year of power shortages.

Aluminum Corp. of China Ltd. and 19 of its peers signed an accord in July to reduce production by as much as 10 percent until the end of the year because of the shortages. Electricity has been rationed in Shandong, Hubei, Shanxi, Henan and Liaoning provinces.

Inflation Slows

Electricity output growth slowed for the fifth straight month to 5.1 percent. Production of steel products, motor vehicles and pig iron fell from a year earlier.

Cement output rose 1.5 percent, down from a 6.3 percent increase in July. Coal production growth accelerated to a 12.1 percent gain. Crude oil output rose 1.6 percent.

Inflation cooled to 4.9 percent last month, the slowest pace since June 2007. Export growth slowed and weakness in imports may partly have reflected softer demand for industrial materials after an official survey showed manufacturing contracted for a second month.

Rising raw-material and labor costs have added to pressure on exporters of shoes, toys and clothes.

As many as 67,000 medium-sized and small companies posted losses in the five months through May, according to the National Development and Reform Commission. In Guangdong province, an export hub, the number of toymakers fell more than 70 percent in the first seven months from a year earlier, as more than 3,600 shut down, the official Xinhua News Agency reported.

Lending Quotas

Policy makers have already loosened loan quotas -- restrictions on how much banks can lend -- and raised export-tax rebates for garments and textiles.

Extra infrastructure spending is another possible tool for stimulating economic growth to prevent a slump. Officials are working on a plan for as much as 400 billion yuan ($58 billion) of spending and tax cuts, according to economists and reports in domestic news media.

A record $28.7 billion trade surplus last month and the fastest producer-price inflation since at least 1996 have complicated monetary policy. Central bank governor Zhou Xiaochuan said Sept. 8 that there is a risk that inflation may rebound.

China's economy expanded 10.1 percent in the second quarter from a year earlier, down from 11.9 percent in all of 2007. Last month's industrial-output growth was the slowest since August 2002 after excluding the distortions in January and February each year caused by China's Lunar New Year holiday.

To contact the reporter on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net

Last Updated: September 11, 2008 22:36 EDT