China's Economic Growth Cools

China's economic expansion cooled to the slowest pace since 2005, handing more ammunition to Chinese officials calling for reduced gains by the yuan as the outlook for exports dims.

Gross domestic product grew 10.1 percent in the second quarter from a year earlier, down from 10.6 percent in the first, the statistics bureau said today in Beijing. Consumer prices rose 7.1 percent in June, slowing from 7.7 percent in May.

China's leaders are under pressure to switch from fighting inflation to protecting exporters by slowing the yuan's appreciation after its 7.1 percent increase against the dollar this year. The Ministry of Commerce has urged China's cabinet, the State Council, to rein in currency gains and increase some export rebates, a ministry official said July 14, speaking on condition of anonymity.

GDP growth cooled for the fourth straight quarter. The U.S. economy grew 2.5 percent in the first quarter.

China's economy has grown an average 9.9 percent a year since leader Deng Xiaoping ditched hard-line Communist policies in favor of free-market reforms in 1978.

Economic problems and uncertainties include rising prices, constraints on agricultural production, lagging rural incomes and global financial market turmoil, the statistics bureau said in a statement.

China's growth is the fastest of the world's 20 biggest economies and is helping to sustain the global expansion this year as the U.S. housing slump and credit-market turmoil threaten to send the world's biggest economy into a recession.

China's export growth slowed to 21.9 percent in the first half from 25.7 percent in all of 2007, as U.S. demand weakened, and prospects for the rest of the year have deteriorated. The U.S. faces ``significant downside risks to the outlook for growth,'' Federal Reserve Chairman Ben S. Bernanke said July 15.

The finance committee of China's legislature called yesterday for policy ``fine-tuning'' to help manufacturers in the world's fastest-growing major economy cope with weakening global demand. Premier Wen Jiabao pledged this month efforts to maintain ``sound and fast'' economic growth and Chinese leaders visited exporters to hear their concerns.

The trade ministry, the National Development and Reform Commission, the customs bureau and the finance ministry agree on the need to slow currency gains, while the central bank disagrees, according to the ministry official. A stronger yuan makes imports cheaper and China's exports more expensive.

Inflation has eased from February's 12-year high of 8.7 percent on smaller gains in food prices. It remains above the central bank's 4.8 percent annual target and rising commodity costs may keep prices elevated.

Producer prices climbed 8.8 percent in June from a year earlier, the statistics bureau said today, after rising 8.2 percent in May.

The yuan's gain versus the dollar this year is more than for all of 2007. The appreciation in the second quarter was 2.3 percent, down from 4.2 percent in the first quarter. The currency remains undervalued, according to officials and manufacturers in the U.S. and Europe.

Besides using the currency to cool inflation, China has imposed lending quotas and ordered banks to set aside a record 17.5 percent of deposits as reserves to soak up cash flooding the economy from trade, foreign direct investment and investors betting on gains by the yuan. The central bank hasn't raised interest rates this year to avoid attracting more money.

Easing monetary policy would risk ``worsening the inflation outlook,'' said Liang Hong, an economist with Goldman Sachs Group Inc. in Hong Kong. The government needs to raise energy prices again after last month's increases to encourage power production and reduce shortages, she said.

Urban fixed-asset investment surged 26.8 percent in the first half from a year earlier, the statistics bureau said, after climbing 25.6 percent in the first five months.

Industrial production rose 16 percent in June.

Reconstruction work after the Sichuan earthquake in May and 300 billion yuan of railway inve...

China, Bloomberg
7/16/2008 8:34:42 PM