China's economy faces unexpectedly sharp decline

BEIJING -- Faced with an unexpectedly sharp decline in its economic growth, China is hastily cobbling together a package of fiscal stimulus measures in hopes of avoiding a more painful unraveling of its economic boom.

China disclosed yesterday that its economy is expanding at its slowest pace since the SARS epidemic of 2003. The slowdown is fuelling fears that the global economic slump will spread to China, which has been a crucial contributor to world growth for the past several years.

China's growth fell to an annualized 9 percent in the third quarter of this year, the slowest rate in the past five years, the national statistics bureau announced this week.

Analysts had expected a small decline in the growth rate, but the drop was greater than expected. China's economy had boomed at a rate of 10.4 percent in the first half of this year and 11.9 percent last year, so the latest number is a continued slide in China's performance.

One leading analyst, Ha Jiming of China International Capital Corp., is predicting that China's growth could fall to 7.3 percent next year if the government fails to introduce a fiscal stimulus package. Such a growth rate might still seem impressive, but it would represent a sharp slowdown and a hard landing for a country that remains vulnerable to any instability.

Many analysts expect that China will begin to announce a series of fiscal measures in early December, followed by further steps in 2009.

A research report this week by Morgan Stanley predicts that China will soon announce a boost in tax rebates to exporters, a cut in fees and taxes for housing purchases, an increase in bank financing for infrastructure projects and small and medium-sized enterprises, and a further three or four cuts in interest rates next year. These steps would follow a series of other stimulus measures that were announced this month.

Much of the quarterly decline in China's economic growth was due to slumping exports. Foreign demand for Chinese products has been severely hit by the global financial meltdown and the U.S. economic slump.

"The growth rate of the world economy is slowing down noticeably, there are more uncertain and volatile factors in the international economic climate, and all these factors are starting to release their negative impacts on China's economy," Li Xiaochao, spokesman for the national statistics bureau, said as he announced the third-quarter numbers yesterday.

The financial crisis today is "even graver" than the Asian economic crisis of 1997, and could be the worst since the 1930s, Li told a news conference.

"It is widespread, far-reaching and entails a lot of uncertainty. ... It certainly has had a bad effect on China's economic development."

Mining companies, heavily reliant on future Chinese demand to justify their most ambitious projects, have been hit hard by the Chinese economic slowdown, which has reduced China's demand for commodities.

In the first three quarters of this year, China's economic growth fell to 9.9 percent, down from 12.2 percent in the same period of last year. About half of this decline was due to slumping exports, Li said.

"The slowdown may not be as deep as people fear, but we do not expect a quick rebound," said a report yesterday by Dong Tao, a research analyst at Credit Suisse.

"This is in line with the anecdotal evidence of weakening auto sales, power consumption, property transactions and domestic steel prices," he said.

Chinese export industries such as garments and toys have suffered major declines this year, with thousands of companies shutting their doors. An industry federation in Hong Kong yesterday estimated that a quarter of the 70,000 Hong Kong-owned businesses in the Pearl River Delta might fold.

"The rapid deterioration in the global economy has impacted the export sector severely, as evidenced by the rise in bankruptcy cases in the Pearl River and Yangtze River delta regions," Dong said. "This is reflected in the very weak industrial production growth, which has sunk to a multiyear low."

Before the announcement yesterday, a survey of economists by Bloomberg had predicted a 9.7-percent growth rate in the third quarter. The actual growth of 9 percent was substantially worse than predicted.

"It suggests that the economy is slowing more quickly than we expected," said Michael Pettis, a finance professor at Beijing University.

The collapse of China's stock market and a slump in the property market could be affecting the behavior of China's consumers, Mr. Pettis said. "My guess is that we're going to see pretty poor growth in consumer demand."

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)