China's economy slows in second quarter as cooling measures take hold


Updated Mon, 19 Jul 2004 00:00:00 GMT

BEIJING (AFP) - Measures to rein in the world's fastest growing economy took hold in the second quarter of the year with figures showing China's gross domestic product (GDP (news - web sites)) rose a lower-than-expected 9.6 percent.

Analysts had predicted second quarter growth of up to 11.5 percent and the data, down from 9.8 percent in the first three months, strongly suggests that lending curbs introduced by the government are working.

GDP in the first half of the year grew 9.7 percent, compared with 8.8 percent in the same period last year, which the National Bureau of Statistics Friday adjusted from 8.2 percent, citing an overestimated impact from SARS (news - web sites).

The second quarter statistics were calculated on revised figures that put growth in the same period last year at 7.9 percent, compared with the original 6.7 percent.

Despite the slower headline figures, they still show Asia's second largest economy racing ahead far above the official 2004 target of about seven percent growth.

Analysts said the unexpected slowdown offered further evidence that China appears headed for a soft landing but it is not out of the woods yet.

"It will be seen as evidence that overheating concerns are overdone and reduces the likelihood of a hard landing," said Tim Condon, chief economist at ING Barings, who had forecast 11.5 percent growth.

Donald Hanna, chief economist at Citibank, warned however that while "the economic tightening policies are being effective they are not severe enough to prevent a hard landing" and more needed to be done.

Fixed-asset investment growth in the first half slowed to 28.6 percent at 2.61 trillion yuan, compared with 31.1 percent a year earlier and 43 percent in the first quarter.

Growth in investment in real estate projects, an area of particular concern among policy makers, also eased, to 29 percent, having gained 41 percent in the January-March period.

Industrial output, meanwhile, measured at industrial firms and non-state companies with annual revenue of five million yuan, was up 17.7 percent in the six months.

Inflation spiked to 5.0 percent in June, its highest point in seven years and at a crucial level where the central bank has strongly suggested it may have to hike interest rates.

In the first six months of the year, consumer prices averaged 3.6 percent, pushed up by rising food prices.

Analysts said, however, the inflation figures may have been distorted by one-off factors, such as the outbreak of Severe Acute Respiratory Syndrome (SARS) last year which hit the economy badly and so made the comparison appear much larger.

"This is a result of a very weak base created by SARS last year. I don't think its alarming. We think it has peaked," Citibank's Hanna said.

"It is not a reflection of current conditions; it is a reflection of the past."

At the same time, Hanna still expects China to raise interest rates, which have not gone up since July 1995, citing a structural need to get them into line with the overall growth rate of the economy.


Authorities have been desperately trying to rein in growth in fixed asset investment to cool the economy, undertaking a series of incremental steps to slow credit, such as a hike in the rediscount rate and a rise in the banks' cash reserve ratios.

NBS spokesman Zhang Jingping said the measures were gradually taking effect.

"In the first half of this year the macro regulatory measures adopted by the government achieved significant results," he said.

"The uncertainties and unhealthy factors existing in economic performance have been initially put under control" but problems still exist.

"We should be aware at the same time that prominent problems existing in the national economy have not been rooted out fundamentally," he said.

Zhang cited bottlenecks in energy and transportation and continuing high growth rates of investment in fixed assets in certain sectors, with industries such as steel, cement and construction seen as key concerns.

He also pointed to the growth rate of purchasing prices for raw materials, fuels and power and prices for investment as too high while "the structure of loans is not rational."