China Output Growth Slows as Leadership Handover Looms

China’s industrial output grew at the slowest pace in three years and President Hu Jintao said the economy faces “notable downward pressure,” signaling more stimulus may follow approvals for subway and road projects.

Production increased 8.9 percent in August from a year earlier and fixed-asset investment growth in the first eight months eased to 20.2 percent, the National Bureau of Statistics said yesterday in Beijing. Inflation accelerated for the first time in five months.

The data underscore risks that full-year growth in the world’s second-biggest economy will slide to its lowest in more than two decades, undermining support for the ruling Communist Party before a once-in-a-decade leadership transition due later this year. The rebound in inflation, excess capacity in some industries and banks’ bad debt risks from past monetary easing highlight the potential cost of ramping up stimulus efforts.

“Politicians want a benign backdrop for their party congress gathering and slumping stock prices and a worsening growth slowdown could spoil the party,” said Lu Ting, chief China economist at Bank of America Corp. in Hong Kong. “Putting together the economic fundamentals and the timing of major political events, there will be a second round of policy easing including cuts to banks’ reserve requirements and some fiscal stimulus.”

The MSCI Asia Pacific Index (MXAP) rose 0.2 percent as of 11:07 a.m. in Tokyo after plans for European Central Bank bond buying and Chinese investment triggered a global rally last week.

Japanese Weakness

Japan’s economy expanded in the second quarter at half the pace the government initially estimated, underscoring the risk of a contraction as Europe’s debt crisis caps exports, a government report showed today.

Gross domestic product grew an annualized 0.7 percent in the three months through June, less than a preliminary calculation of 1.4 percent. The nation’s current-account surplus fell to 625.4 billion yen ($8 billion) in July, the lowest for that month since 1996, according to a finance ministry report and Bloomberg historical data.

In Europe today, final second-quarter numbers will give the latest reading on a shrinking Italian economy, while France may report that industrial production declined in July.

In China, customs bureau data today may show exports rose 2.9 percent from a year earlier, according to the median estimate in a Bloomberg News survey, down from a 24.5 percent gain in the same month last year. Overseas shipments in July rose 1 percent as sales to European Union countries fell and growth in U.S. exports stalled.

Trade Outlook

China’s Commerce Minister Chen Deming said measures to support and stabilize trade will be announced soon, according to an interview broadcast yesterday by China Central Television. He also said trade in the fourth quarter will be better than in the third.

UBS AG and ING Groep NV on Sept. 7 cut their forecasts for economic expansion this year to 7.5 percent amid a weakening global outlook and less forceful policy support than they previously expected. That would be the slowest pace since 1990.

ING lowered its estimate for China’s third-quarter growth to 7.1 percent while UBS projects a 7.3 percent pace. The economy expanded 7.6 percent in the three months through June from a year earlier, the least in three years and the sixth straight slowdown in growth.

‘Arduous Task’

Speaking to business executives at an Asia-Pacific Economic Cooperation forum in Vladivostok on Sept. 8, President Hu said China’s small and medium-sized enterprises are having a “hard time” and exporters are facing more difficulties. The government has an “arduous task of creating jobs for new entrants to the labor force.”

Hu also urged governments in the Asia-Pacific region to speed up infrastructure development, describing it as key to promoting recovery and achieving sustained and stable growth amid increasing downward risks to the global economy.

His comments followed a slew of announcements by the Chinese government approving new roads, railways and urban infrastructure that Nomura Holdings Inc. estimates have a combined value of about 1 trillion yuan.

The news drove the Shanghai Composite Index (SHCOMP), China’s benchmark stock gauge, 3.7 percent higher on Sept. 7, the biggest gain in eight months. The index had previously dropped 17 percent from this year’s March 2 high as cooling economic growth hurt earnings.

Inflation Accelerates

Sany Heavy Industry Co. (600031) the nation’s biggest machinery maker, jumped the most since February 2009 and Anhui Conch Cement Co., China’s largest cement maker, had its biggest gain since July 2010, on optimism demand for their products will rise.

Inflation last month accelerated to 2 percent from a year earlier, the statistics bureau said yesterday. The decline in producer prices extended into a sixth month, with a drop of 3.5 percent.

“A renewed inflationary trend could prove to be a further complication to policy makers’ growth-inflation trade-off,” said Glenn Maguire, chief economist at consultant Asia Sentry Advisory in Sydney. “China will have enormous difficulties in crafting a policy response to these divergent price and activity trends.”

The increase in August industrial production was the weakest since May 2009. Power output rose 2.7 percent from a year earlier, the statistics bureau said, compared with 2.1 percent in July. Growth in production of rolled steel slumped to 1.4 percent.

‘Weak Data’

Growth in fixed-asset investment excluding rural households in the first eight months was lower than the median estimate of 20.4 percent. Retail sales rose 13.2 percent from a year earlier in August, in line with the median economist estimate.

“Such a weak series of economic activity data should now seriously alert policy makers,” said Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “The monetary policy stance will have to become more aggressive in order to arrest the rapidly deteriorating economy.”

Liu said the central bank will need to cut banks’ reserve requirement ratio by another 150 basis points this year.

The central bank has held off from monetary policy loosening since July 5 when it cut benchmark interest rates for the second time in less than a month.

Zhang Zhiwei, Hong Kong-based chief China economist at Nomura, said some leading indicators improved “very significantly” last month, pointing to better property and infrastructure investment in coming months.

The value of land purchased by developers rose 66 percent in August from a year earlier after falling 39 percent in July, he said. Investment in new projects gained 33 percent after a 25 percent increase the previous month, he said.

“These suggest economic momentum will pick up soon,” said Zhang, who estimates growth will rebound to above 8 percent in the fourth quarter.

To contact the reporter on this story: Bloomberg News in Beijing at lzheng32@bloomberg.net

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

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