China's Economy Grows 9%, Slowest Pace in Five Years (Update3)

By Kevin Hamlin and Li Yanping

Oct. 20 (Bloomberg) -- China's economy, the biggest contributor to global growth, expanded at the slowest pace in five years as the financial crisis cut demand for exports.
Gross domestic product rose 9 percent in the third quarter from a year earlier, the statistics bureau said in Beijing today. That was less than any of the 12 estimates in a Bloomberg News survey and the 10.1 percent gain in the previous three months.
The fifth quarter of slowing growth may exacerbate declines this year in iron ore, copper and oil prices and undermine demand for exports within Asia, where economies are already contracting. The cabinet announced yesterday increased infrastructure spending and tax cuts for exporters and the central bank may be poised to cut interest rates for the third time this year.
``This will shake confidence and underscores that no one is immune,'' said Ben Simpfendorfer, an economist with Royal Bank of Scotland Plc in Hong Kong. He predicts three more rate cuts by the middle of next year and a further easing of lending restrictions.
Inflation cooled to 4.6 percent in September, the slowest pace since June 2007, on easing commodity prices.
The CSI 300 Index of stocks climbed 3.1 percent as of 2:54 p.m. in Shanghai on speculation that stimulus measures will aid companies' profits. The yuan traded at 6.8295 against the dollar from 6.8296 before the data was released.
`Spreading, Deepening' Crisis
Growth is slowing across Asia, where Japan's economy shrank in the second quarter and Singapore has tumbled into a recession.
Financial market turmoil and a global slowdown ``have started to have a negative impact on China's economy,'' Li Xiaochao, a statistics bureau spokesman, said. ``The subprime crisis that broke out last year in the U.S. is still spreading and deepening.''
China's expansion was the weakest since the severe acute respiratory syndrome, or SARS, epidemic slashed growth in the second quarter of 2003. The median estimate of the economists in the survey was for growth of 9.7 percent.
The contribution of trade to growth halved to 1.2 percentage points in the first nine months from a year earlier. Export growth may slow ``substantially,'' Li said.
Industrial production rose 11.4 percent in September, the slowest pace in more than six years excluding seasonal distortions, on weaker export orders and factory closures to clear the air for the Olympic Games.
Investment Growth Accelerates
Growth in urban fixed-asset investment accelerated to 27.6 percent in the first nine months from a year earlier, today's data showed, from 27.4 percent through August. Railway and earthquake reconstruction spending may help to sustain that pace.
Retail sales rose 23.2 percent in September, close to the fastest pace in at least nine years. Producer prices rose 9.1 percent last month, down from a 10.1 percent gain in August.
Urban disposable incomes for the first nine months rose 14.7 percent to 11,865 yuan ($1,737) from a year earlier. Rural cash incomes climbed 19.6 percent to 3,971 yuan. Those numbers were boosted by inflation.
The State Council yesterday cited slower growth in fiscal revenue and company profits and ``volatility and sluggishness'' in stocks as effects of the global crisis. The CSI 300 has fallen 65 percent this year.
Demand for Steel
Rio Tinto Group, the world's second-largest aluminum producer, last week flagged ``significantly weaker'' demand for the metal in China. Prices for Chinese imports of iron ore also fell to a 19-month low on cooling demand from steelmakers.
Oil has fallen 47 percent since the start of July and copper has tumbled 43 percent.
About half of China's toymakers have shut down this year, with 7,000 workers losing their jobs when Smart Union Group Holdings Ltd. closed factories in Guangdong province this month, state media say. A quarter of 70,000 Hong Kong-owned businesses in the Pearl River Delta may go bust, the Federation of Hong Kong Industries estimated today.
The central bank has stalled gains by the yuan against the dollar since mid-July, protecting jobs in export industries.
China's export growth may plummet from 22 percent in the first nine months of this year to ``zero or even negative growth'' in 2009, according to Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.
China's `Resilience'
Still, China's economic growth remains the fastest of the world's 20 biggest economies and shows ``remarkable resilience,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong.
Besides the darkening outlook for exports, weakness in the property market is a threat to the world's fourth-biggest economy.
Home sales by volume plunged 55.5 percent and 38.5 percent in Beijing and Shanghai in the first eight months from a year earlier, according to the official Xinhua News Agency. The State Council said that it would increase the supply of low-cost housing and reduce property transaction fees.
A fiscal surplus and a world record $1.9 trillion of currency reserves allow the government to step up spending. The International Monetary Fund estimated this month that China's economy may expand 9.3 percent next year compared with growth of 0.1 percent in the U.S., 0.2 percent in the euro area, and 0.5 percent in Japan.
Easing inflation cleared the way for two interest-rate reductions in a month, the latest on Oct. 8, when the U.S. Federal Reserve and five other central banks also made cuts in an emergency bid to thaw credit markets.
``Flexible and prudent'' economic policies are needed for steady and rapid growth, the statistics bureau's Li said.
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G-7 to Contract Most Since Great Depression, Deutsche Says


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By Jennifer Ryan
Oct. 20 (Bloomberg) -- The economy of the Group of Seven nations will contract by the most since the Great Depression next year as tighter credit markets hurt consumption, forcing central banks to cut interest rates, Deutsche Bank AG said.
The combined G-7 will contract 1.1 percent in 2009 after expanding 0.8 percent this year, Deutsche Bank economists Peter Hooper and Thomas Mayer said in a research note. The U.S. will shrink 1 percent, the euro region will contract 1.4 percent and Japan will shrink 1.2 percent, they said.
The economic slump follows a yearlong credit squeeze that's toppled banks including Lehman Brothers Holdings Inc. and culminated in the Standard & Poor's 500 Index's worst weekly decline since 1933. Higher credit costs will strangle consumer spending and business investment just as unemployment rises, the Deutsche Bank economists said.
``We now expect a major recession for the world economy over the year ahead,'' Mayer and other economists said. ``A major cutback in credit to the real economy across the world has led to the deterioration in the outlook. We were not anticipating such a huge financial shock since our Oct. 3 forecasts.''
The G-7 consists of the U.S., Canada, Japan, France, Italy, Germany and the U.K. Growth across the world economy as a whole will slow to 1.2 percent from 3.2 percent this year, the slowest since the early 1980s, according to Deutsche Bank forecasts.
A global recession and cooling inflation will give the Federal Reserve, the European Central Bank and the Bank of Japan scope to help the economy with lower rates, Deutsche Bank forecast.
Fed Cuts
The Fed will cut the benchmark interest rate to 1 percent at its Oct. 29 meeting from the current 1.5 percent, Deutsche Bank said. It previously predicted rates to fall to that level over a period of 12 months and the economy to stagnate in 2009.
Mayer said he hasn't cut economic forecasts ``by such a large amount in such a short period of time'' in the 20 years he's been working in finance.
The ECB will lower its key rate to a record 1.5 percent over the next 12 months from the current 3.75 percent, Deutsche Bank said. The economists previously forecast the central bank to cut to 3 percent over the period and the economy to shrink 0.2 percent next year.
The Bank of Japan will lower its benchmark to 0.25 percent in early 2009, against an earlier forecast of no change, Deutsche Bank said. The rate is now 0.5 percent. The economists also said Japan's economy would shrink 1.2 percent, which compares with a previous forecast that it would expand 0.4 percent.
Global inflation will slow to 3.1 percent from 5.6 percent this year, Deutsche Bank said. The forecasts exclude data for economic growth during World War II, Deutsche Bank said.