China’s Economy Expands at Slowest Pace in Two Years on Drag From Europe

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A factory worker assembles lithium ion batteries at the China BAK Battery Inc. facility in Tianjin, China.

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Photographer: Keith Bedford/Bloomberg

A factory worker assembles lithium ion batteries at the China BAK Battery Inc. facility in Tianjin, China. Close

A factory worker assembles lithium ion batteries at the China BAK Battery Inc. facility in Tianjin, China.

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A Sany Heavy Industry Co. worker machines parts at the company's factory in Changsha. Close

A Sany Heavy Industry Co. worker machines parts at the company's factory in Changsha.

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Wen Jiabao, China's premier, pauses during a news conference in Germany. Close

Wen Jiabao, China's premier, pauses during a news conference in Germany.

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A worker walks past a public housing project in Beijing.

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A tourist holds 100 yuan bank notes in Beijing.

China’s economy grew 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009, driving stocks lower on concern that Europe’s debt crisis is dragging on the global recovery.

The gain was less than the median estimate of 9.3 percent in a Bloomberg News survey of 22 economists and followed a 9.5 percent increase in the previous three months. The statistics bureau released the data in Beijing today.

Asia’s benchmark stock index sank after China’s growth was limited by tighter credit and weaker demand from Europe, where Germany yesterday rejected speculation that any immediate resolution of the region’s crisis is possible. A slowdown in the pace of China’s expansion, which remains five times that of the U.S., may help Premier Wen Jiabao to tame inflation that is above the government’s target.

“The latest developments in the euro zone have unnerved investors and many are fearful we’re going to see a repeat of the slump we saw at the end of 2008,” said Tim Condon, Singapore-based head of Asian research at ING Groep NV (INGA) and a former World Bank economist. A “hard landing” for China would require a bigger “shock” to growth than is likely, he said.

The Shanghai Composite Index closed 2.3 percent lower, the biggest loss in almost a month. The MSCI Asia Pacific Index fell as much as 2.7 percent. The yuan weakened 0.2 percent to 6.3813 per dollar.

Export Slowdown

Exports were the equivalent of 27 percent of gross domestic product in 2010. Growth in shipments to the European Union tumbled to 9.8 percent in September from 22 percent in the previous month, data released last week showed.

Industrial production increased 13.8 percent in September from a year earlier, the statistics bureau said. That compared with the 13.4 percent median estimate in a Bloomberg survey and a gain of 13.5 percent the previous month.

Investors’ concerns about China’s economy are focused on bad-debt risks for banks, funding for small businesses, and the ability of local governments to repay money borrowed for infrastructure projects. China Business News reported today that rail projects have been halted due to cash shortages and the People’s Daily reported that some road building has stalled for the same reason.

“The risk of a hard landing is a distant scenario,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group Ltd. (ANZ) in Hong Kong. HSBC Holdings Plc and Bank of America Merrill Lynch echoed that view. Barclays Capital said the nation’s full-year expansion should be about 9 percent, with growth to slow to below 8.5 percent this quarter.

Monetary Policy

Any “outright easing of monetary policy will have to wait until inflation expectations stabilize and external demand falls sharply,” said Liu, adding that “partial easing” could include reducing reserve requirements for small and medium-sized banks.

Fixed-asset investment excluding rural households climbed 24.9 percent in the first nine months, compared with the 24.8 percent estimated by economists and a 25 percent gain through August. Property investment for January-to-September rose 32 percent, from 33.2 percent through August.

Retail sales expanded 17.7 percent after a 17 percent increase in August.

Companies including BASF SE, the world’s largest chemicals company, are expanding in China as higher wages and consumption boost demand. The German company and China Petroleum & Chemical Corp (600028) this month completed an expansion of an ethylene plant in the eastern city of Nanjing.

‘Balancing Act’

China’s economy grew 2.3 percent in the third quarter from the previous three months, seasonally adjusted, the statistics bureau said today. That compared with a revised 2.4 percent gain for the second quarter.

Asian policy makers face a “delicate balancing act” with inflation remaining elevated while Europe’s crisis threatens growth, the International Monetary Fund said last week. German Chancellor Angela Merkel’s office yesterday curbed expectations for a breakthrough at a summit in Brussels this weekend.

China’s Xinhua News Agency reported today that Chinese Vice Premier Wang Qishan and U.S. Treasury Secretary Timothy Geithner discussed the global economic and financial situation and bilateral economic relations by phone. It didn’t elaborate.

Borrowing Costs

China has raised interest rates five times over the past year, curbed lending and imposed limits on home purchases to rein in property and consumer prices and limit the risk of asset bubbles. Home prices gained in fewer than half of 70 cities monitored by the government in September from August as sales eased, statistics bureau data showed today.

While inflation was more than 6 percent for a fourth month in September, Deutsche Bank AG forecasts the rate will drop to 4 percent -- the government’s full-year target -- in December.

China’s money supply expanded at the slowest pace in almost a decade last month and new lending was the smallest since December 2009, central bank data showed last week. A credit crunch in some parts of China prompted the State Council to this month unveil tax breaks and financial support for small businesses.

A property slump and slowing export growth are among the biggest risks, according to economists at UBS AG, Nomura Holdings Inc. (8604) and Societe Generale.

Beijing, Guangzhou

A drop in land prices in cities including Beijing and Guangzhou and falling land sales presage a slowdown in property investment, according to Nomura’s Hong Kong-based economist Zhang Zhiwei. Vincent Lo, chairman of Shanghai-based Shui On Land Ltd. (272), said last month one bank withdrew loan approvals for his company and other developers.

UBS economist Wang Taosees a “global downturn or recession” as the main danger facing the world’s largest exporter in the next 12 months. GDP growth may drop to as low as 7.7 percent in the first quarter of 2012 as “a sharp deceleration” in foreign demand adds to weaker domestic production, according to Wang.

Overseas sales rose less than expected in September and the customs bureau warned of “severe challenges” as the global outlook dims.

That may weigh on China’s currency, which gained 18 percent against the dollar in the past four years, the most among 25 emerging-market currencies. Premier Wen pledged to maintain a “basically stable” exchange rate to protect exporters, the Xinhua news agency reported Oct. 15, citing remarks he made in the southern city of Guangzhou.

China’s economy expanded 10.4 percent last year. Growth will slow to 9.5 percent this year, six times the pace of the U.S. and euro area, according to International Monetary Fund estimates released last month.

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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