Dec. 19 (Bloomberg) -- China’s industrial output growth will drop further and the government must take measures to sustain production to protect jobs and social stability, Li Yizhong, head of the Ministry of Industry and Information Technology said.

“Unprecedented” declines in the prices of some products such as chemicals and steel, increasing overcapacity in industries including autos, and banks’ reluctance to lend may cause a deeper slowdown in production, Li said at a ministry meeting in Beijing today. His comments were posted on the ministry’s Web site.

Royal Bank of Scotland today cut its forecast for expansion in the world’s fourth-largest economy in 2009 by almost half to 5 percent, citing a slowdown in investment, exports and consumption growth. Premier Wen Jiabao’s 4 trillion yuan ($585 billion) stimulus package may not have an impact on growth until the second half of next year.

“This will feel like a recession to the average citizen,” RBS’s Hong Kong-based economist Ben Simpfendorfer said in a research note today. “The three main drivers of GDP growth in the past five years will not recovery rapidly.”

Industrial production growth may not recover until the second quarter or third quarter of 2009 when companies’ inventory runs down to “normal levels,” central bank vice governor Yi Gang said in Beijing today, according to a transcript of Yi’s speech at a conference on the Web site www.sohu.com.

Falling Output

China must maintain at least 12 percent expansion in industrial output next year to achieve its target of 8 percent economic growth, minister Li said today. Production accounts for 43 percent of the nation’s gross domestic product and output of steel, vehicles and electricity is falling, he said.

Liu He, a senior government policy adviser, said on Dec. 13 economic indicators may worsen in December after imports and exports fell last month and industrial production grew 5.4 percent, the slowest pace since at least 1999.

“Many small and medium-sized companies are in difficulty and some large companies have taken a severe hit,” Li said today. The nation’s biggest steelmakers, including Baosteel Group Corp. and Angang Steel Co., are cutting production or suffering losses, he said.

Towns and cities face the risk of labor shortages if migrant laborers who will have traveled to their hometowns for the Lunar New Year holiday do not return to work, Li said. The new year vacation falls in the last week of January next year.

A labor ministry survey estimated that nearly 5 million migrants returned home by the end of November as companies slashed jobs, Caijing Magazine reported on Dec. 17. The unemployment rate among China’s 140 million migrant workforce may have risen to 7 percent by November, the magazine cited an unidentified labor ministry official as saying.

China will revise its industrial policies, encourage bank lending and offer tax breaks to revive industrial production and support the economy, the minister said today. “Protecting industrial production is to protect employment and protect stability,” Li said.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net

Last Updated: December 19, 2008 07:30 EST