China’s industrial output slows in October

From the FT this morning, via Reuters.

China’s industrial output growth slowed a little in October under the weight of government policy curbs, but its tempo was still so high that economists said a further rise in interest rates was just a matter of time.

Factories churned out 17.9 per cent more goods than a year earlier, weaker than September’s 18.9 per cent pace of expansion and undershooting forecasts of an 18.3 per cent rise.

“We expect further moderation in industrial growth towards end of the year, given continued monetary tightening and sector-specific administrative measures aiming at putting a brake on investment spending,” Qian Wang, an economist at JPMorgan Chase in Hong Kong, said in a note to clients.

The government has taken particular aim at low-end industries that guzzle energy or pollute the environment by ending tax breaks and withholding planning permission. The real estate sector has also been in the crosshairs.

Thursday’s report provided further evidence, on top of slower export growth in recent months, that Beijing’s policies are starting to bite.

Output of non-metal minerals, ferrous metals, cast iron and steel was slower in October than in the first nine months, while growth in coal and cement production slowed abruptly to 4.0 per cent and 9.8 per cent, respectively, from a year earlier.

“As cement is used as a major building material, slower production could signal a slower property market ahead,” economists at BNP Paribas said in a report.

Still, the dip in growth was modest and from a breakneck pace. Output in the first 10 months of 2007 was up a prodigious 18.5 per cent from a year earlier, by far the fastest rate of growth in any major economy.

Chris Leung, an economist with DBS in Hong Kong, noted that October’s dip came after a super-sized gain in September. A week-long national holiday in early October had an impact, too.

“But even if I discount this factor, the trend is still very robust,” Mr Leung said.

The World Bank forecast on Thursday that China’s gross domestic product would grow 11.3 per cent this year and 10.8 per cent in 2008, which would mark the sixth straight year of double-digit expansion.

The sustained growth has fanned worries that the world’s fourth largest economy could boil over.

The State Council, China’s cabinet, said on Wednesday that inflationary pressure was quite strong, while Zhou Xiaochuan, central bank governor, has voiced concern that prices will keep ratcheting higher if people become accustomed to inflation.

After consumer price inflation rebounded in October to a nearly 11-year high of 6.5 per cent, economists expect Mr Zhou will try to contain inflationary expectations by raising interest rates before long for the sixth time this year.

Indeed, Yu Song and Hong Liang at Goldman Sachs told clients to be ready for two 0.27 percentage point increases before the end of the year.

They also expect the central bank to take further steps to withdraw cash from the banking system and to let the yuan rise faster – a key demand of US and European policy makers.


and Bloomberg:

China's industrial production grew 17.9 percent in October as automobile and electronics output accelerated, underscoring government concern that the world's fastest-growing major economy risks overheating.

The increase was less than September's 18.9 percent, according to figures released by the statistics bureau today, and compares with the 18.5 percent median estimate of 22 economists surveyed by Bloomberg News.

The slowdown may be insufficient to deter the central bank from raising a one-year lending rate that's already climbed 1.17 percentage points this year to a nine-year high of 7.29 percent. Premier Wen Jiabao yesterday pledged to tighten economic controls after inflation accelerated to the fastest in a decade and the trade surplus widened to a record.

``Beijing knows that we are on the verge of overheating and interest rates need to rise very soon,'' said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai.

The key rate compares with 4.5 percent in the U.S., 5.75 percent in the U.K. and 0.5 percent in Japan.

China should raise interest rates and allow more currency appreciation, the World Bank said today. Bigger yuan gains would staunch money inflows by pushing up export prices. The currency has climbed 11 percent versus the dollar since a fixed exchange rate ended in July 2007.

Production growth was higher than the 14.7 percent gain a year earlier and the 16.6 percent expansion for all of 2006. Output rose 18.5 percent for the year through October.

Automobiles, Computers

Automobile output rose 24.3 percent in October from a year earlier. Computer, telecommunications and electronic equipment production climbed 18.9 percent.

SAIC Motor Corp., China's largest carmaker, plans a 12 percent increase in production this year to 1.5 million vehicles, Chairman Hu Maoyuan said Oct. 16.

China's economy, the world's fourth largest, expanded 11.5 percent in the third quarter from a year earlier. Inflation accelerated to 6.5 percent in October, matching August's rate. The monthly trade surplus was $27 billion.

Spending on factories and property probably climbed 26.2 percent in the first 10 months, according to a Bloomberg News survey of economists. That figure, the last in this round of data, is due at 10 a.m. tomorrow.

``Data released this week has shown increased risks of overheating and the central bank has little excuse not to raise interest rates,'' said Wang Tao, head of economics and strategy for Greater China at Bank of America Corp. in Beijing.

Pollution, Energy

China is trying to curb investment in industries that have overcapacity, consume too much energy and produce excessive pollution. The premier said last month that the government will limit land use, tighten investment-project approvals and guide bank lending.

``Policy tightening'' has cooled factory output, said Ben Simpfendorfer, a strategist at Royal Bank of Scotland Plc in Hong Kong. ``It will moderate further in the early part of next year as exports slow on weaker global demand.''

While the trade surplus reached a record on Christmas shipments, the 22.3 percent gain in exports from a year earlier was the smallest increase in seven months. Retail sales in the U.S. rose 0.2 percent in October from the previous month after gaining 0.7 percent in September, the Commerce Department said yesterday.

Export Demand

Weaker growth in demand for exports ``may be a factor behind the moderation in industrial production growth,'' said Liang Hong, senior economist at Goldman Sachs Group Inc in Hong Kong. Inflation leaves the government ``with little choice but to tighten monetary policy further,'' she said.

Besides rate increases, the People's Bank of China is boosting the proportion of deposits that lenders must set aside as reserves to 13.5 percent, the highest level since at least 1987, from Nov. 26. That's up from 9 percent at the start of the year.

China's banking regulator met with the five biggest state- owned banks on Nov. 13, asking them to slow lending, the official Shanghai Securities News reported.

In India, the world's second-fastest growing major economy, industrial production grew 6.4 percent in September.