January 24, 2008 / 2:20 AM / 12 years ago

China's economy eases as exports slow

BEIJING (Reuters) - China grew 11.4 percent in 2007, the fastest pace in 13 years, but is headed for a modest slowdown this year as global demand weakens and credit curbs to cap inflation ripple through the economy.

A worker walks in a new five-star hotel construction site in downtown Shanghai, January 24, 2008. China's economy grew 11.4 percent in 2007, the fastest pace in 13 years. REUTERS/ Nir Elias

The softening was evident in figures issued on Thursday showing that annual gross domestic product growth eased to 11.2 percent in the fourth quarter from 11.5 percent in the July-September period and 11.9 percent in the second quarter.

“If economic growth sees a mild slowdown, that would be within our expectations,” Xie Fuzhan, head of the National Bureau of Statistics, told a news conference.

Still, 2007 marked the fifth consecutive year of double-digit growth for China, which is on course to overtake Germany as the world’s third-largest economy this year and is growing in importance as a locomotive for global growth.

“Average growth over the last five years has been 10.6 percent — that’s really extraordinary. The ups and downs each year have also been limited — that’s also extraordinary,” Xie said.

As global credit woes stemming from the U.S. subprime crisis drag down demand for China’s exports, which contributed about a third of last year’s increase in GDP, economists expect China’s growth this year to dip to around 10 percent.

That would match the average growth rate China has enjoyed since it embarked on market reforms in 1978 and would maintain its status as the world’s fastest-growing major economy.

If the economy slows more than expected, economists are in no doubt that Beijing will unwind some of the restrictive policies it has rolled out over the past year.

“China may relax its tightening after March if domestic consumption is not as strong as expected and if investment drops sharply,” said Zhao Qingming, an economist with China Construction Bank in Beijing.

The ruling Communist party, economists say, wants above all to avert an economic hard landing that could sap its legitimacy as it prepares to show off China to the world in August’s Olympic Games.

INFLATION WORRIES

“I’m positive about China’s economy this year, Xie said. But he added: “The government could adopt a number of policies to offset the negative impact that could come from a slowing U.S. economy.”

Yet China is also wary of inflation, which has touched off social unrest many times in the past.

Although consumer price inflation slowed to 6.5 percent in December from an 11-year high of 6.9 percent in November, factory-gate inflation jumped to 5.4 percent from 4.6 percent.

“Even if there are no new price rises, the lagged effect of price increases in 2007 will by itself bring with it heavy inflation pressures this year,” Xie said.

This leaves China in much the same position as the European Central Bank: aware that it might need to ease policy to prop up the economy, but worried that inflation is above target.

“China definitely needs to tighten further to tame inflation,” said Song Guoqing, an economics professor at Peking University.

To cap inflation and prevent overheating, Beijing raised interest rates six times last year and gave banks blunt orders to lend less.

Alarmed by surging prices, the authorities this month also froze energy and transport tariffs and imposed temporary price controls on food — the fount of the latest spike in inflation.

“China will not relax its tightening, at least in the short term, as the growth rate is still on the high side and inflation is going up,” said Zhang Yongjun, a senior economist with the State Information Centre, a government think-tank in Beijing.

“But in the second half, if the economy keeps slowing down and inflation comes down, the tightening measures might be eased somewhat,” he added.

Reporting by Jason Subler, Zhou Xin, Eadie Chen, Simon Rabinovitch and Langi Chiang; Writing by Alan Wheatley

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