China's economy slows sharply, worse yet to come

BEIJING (Reuters) - China’s economic growth slumped to 6.8 percent last quarter, dragging down the pace of expansion for all of 2008 to a seven-year low of 9.0 percent as the full force of the global financial crisis struck home.

Fourth-quarter growth in gross domestic product, measured from a year earlier, dropped from the 9.0 percent clip of the July-September quarter but was close to market expectations of a 7.0 percent reading.

The slowdown in 2008 snapped a five-year streak of double-digit growth that has turned China into the third-largest economy in the world after the United States and Japan.

“The international financial crisis is deepening and spreading with continuing negative impacts on the domestic economy,” the National Bureau of Statistics said in a statement on Thursday accompanying the release of the figures.

A record 35 percent plunge in Japanese exports in December from year-earlier levels, as well as a sharp contraction in South Korea’s economy in the fourth quarter, suggests there will be no relief any time soon for Asia’s export-dependent economies, including China.

Many economists, especially those at Western banks, believe China will expand by no more than 5-6 percent this year, which would be the weakest performance since 1990.

“We expect growth of 6.0 percent for 2009 as a whole, with risks still skewed to the downside,” Royal Bank of Canada said in a commentary.


Others agree the economy will remain weak in the first half but think Beijing will hit its target of 8 percent growth for all of 2009 as November’s 4 trillion yuan ($585 billion) stimulus package and much easier monetary policy kick in.

“The government has realized the fact that the economy is declining and regards the 8 percent target as a political task. Therefore, I think we can achieve the goal,” said Jin Yanshi, chief economist at Sinolink Securities in Shanghai.

This was the line taken by the head of the statistics office, Ma Jiantang, who said the swoon in growth would be short-lived.

“As long as we can boost domestic demand and increase investment, we can absolutely achieve the 8 percent GDP growth target in 2009,” he told a news conference.

Shanghai shares closed at a one-month high, rising 1 percent on relief that growth was not even weaker.

Ma acknowledged that December’s data showed the economy had been hit hard. Still, inflation-adjusted retail sales and fixed-asset investment held up well, while annual industrial production growth recovered to 5.7 percent from November’s record low reading of 5.4 percent.

Many economists are skeptical about the quality of China’s statistics, which they say are susceptible to political manipulation. The result, these critics say, is that trends in various data series often appear too smooth to be convincing.

Still, Thursday’s GDP figures were consistent with recent data showing falling power consumption and declines in November and December in both exports and imports as the bottom fell out of the world economy.

“Q4 GDP growth of 6.8 percent holds little water,” said Bian Xubao, an analyst with Qilu Securities in Jinan, using the Chinese phrase that describes when figures are artificially inflated.


Bian said rising bank lending, which surged in December, would complement the government’s spending plans and lift growth.

“If we can get nominal annual investment growth of over 30 percent, there will be no problem in achieving full-year GDP growth of 8 percent,” he said.

Capital spending on fixed assets such as flats and factories -- the main driver of Chinese growth in recent years -- rose 25.5 percent in 2008, up from 24.8 percent in 2007.

Growth of 8 percent is widely regarded as the minimum China needs to create enough jobs for people entering the workforce. Beijing has made no secret of its concern that rising unemployment poses a threat to social stability and the legitimacy of the ruling Communist Party.

The statistics office stressed the need to promote rapid growth to maintain a “harmonious and stable social climate.”

An estimated 10 million migrant workers have already lost their jobs in export industries battered by a collapse in demand in the United States and Europe and the evaporation of trade finance as hard-hit global banks cut off credit lines.

Reporting by Zhou Xin and Simon Rabinovitch; Writing by Alan Wheatley; Editing by Ken Wills