China's economic growth slows amid credit curbs

[July 15, 2010]  BEIJING (AP) -- China's rapid growth is slowing as its huge stimulus winds down and Beijing cools a credit boom, possibly weakening a global recovery.

The world's third-largest economy expanded by 10.3 percent in the second quarter over a year earlier, down from the first quarter's explosive 11.9 percent growth, the National Bureau of Statistics said Thursday.

China's ability to help drive a global recovery might be dented if slower growth cuts its appetite for U.S. and European factory machinery, industrial components from Asian suppliers and iron ore from Australia and Brazil.

"The speed of economic growth is declining fast," said economist Xing Ziqiang of China International Capital Corp. in Beijing. "Countries that export raw materials to China will feel a bigger impact from declining investment."

China rebounded quickly from the global downturn, powered by a 4 trillion yuan ($586 billion) stimulus and a flood of bank lending. But communist leaders worry about surging home prices and a possible spike in bad loans at state-owned banks. They have imposed curbs on lending and investment, key drivers of growth and demand for raw materials.

A statistics bureau spokesman, Sheng Laiyun, said despite the decline, growth is "very high" and within the government's target range. The official growth target for the year is 8 percent, which analysts say China easily should achieve.

"A slowdown in the growth rate will benefit the economy because it will prevent it from growing too fast and being overheated," Sheng said at a news conference.

He said lower growth would help Beijing's effort to boost domestic consumption and reduce reliance on resource-intensive investment and exports to drive growth.

June growth in factory output slowed to 13.7 percent, down from May's 16.5 percent rise. Growth in retail sales and investment in factories and other fixed assets also eased.

June exports rose 35 percent over a year earlier but analysts expect Europe's debt crisis to crimp trade. A survey earlier by a Chinese business group found manufacturing activity in June fell for a third month as foreign orders declined.

"There is evidence in the June activity data that the economy is slowing faster than anticipated," said Mark Williams of Capital Economics in a report. Beijing could stimulate the economy by easing credit, he said, but that would "underline that China's challenge of generating strong and sustainable domestic demand growth remains unresolved."

China's latest expansion leaves it poised to pass Japan as the second-largest economy behind the United States. China reported 2009 output of $4.98 trillion, just behind Japan's $5.1 trillion. And China is growing much faster than its neighbor.

June inflation eased to 2.9 percent over a year earlier, falling back below the government target of 3 percent for the year after prices rose 3.1 percent in May.

Also Thursday, the government said foreign direct investment in China rose 39.6 percent in June over a year ago to $12.5 billion.

Beijing tightened controls on mortgage lending this year to stop speculation fueled by stimulus-related lending and blamed for a double-digit rise in housing prices.

The measures finally appear to be working. The government reported this week that housing prices fell in June for the first time in 18 months, declining 0.1 percent from May, though they still were up 11.4 percent from a year earlier.

Beijing has tried to use targeted controls to curb lending while avoiding an across-the-board interest rate hike that might derail growth. Last Friday, the central bank promised a "moderately easy" monetary policy for the rest of the year.

Despite the credit clampdown, the International Monetary Fund raised its China growth forecast for 2010 from 10 percent to 10.5 percent this month. But some private sector analysts have cut their estimates.

Goldman Sachs lowered its forecast this month from 11.4 percent to 10.1 percent while JP Morgan lowered its outlook from 10.8 percent to 10 percent. CICC's Xing said he expects 9.5 percent growth after the full impact of Europe's debt crisis and Chinese investment curbs hit in the second half.

Thursday's data also showed investment still is growing faster than retail spending despite efforts to promote domestic consumption. Retail sales rose 18.2 percent in the first half but spending on factories and other fixed assets jumped 25 percent.

"Though we have this good start, we still have to be keenly aware of the volatile situation outside China and the many difficulties and challenges we face in this country," said Sheng, the statistics bureau spokesman.

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National Bureau of Statistics (in Chinese): http://www.stats.gov.cn/

[Associated Press; By JOE McDONALD]

Associated Press researcher Bonnie Cao contributed to this report.

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