China's economic growth unexpectedly slowed in the second quarter, suggesting government lending curbs are cooling the world's fastest-growing major economy. Gross domestic product rose 9.6 percent from a year earlier after climbing 9.8 percent in the first quarter, the government said in Beijing. The gain is less than the median 10.5 percent increase forecast in a Bloomberg News survey of 10 economists.
Chinese shares rallied as the report showed Premier Wen Jiabao has been able to slow investment growth, reducing the need for the central bank to raise interest rates for the first time in nine years. Companies including Finland's Nokia Oyj and Cleveland-based Eaton Corp. say the government may avoid a sudden economic slowdown that would limit demand for their products. ``The way we see China evolving in the second half is good and stable,'' Nokia Chief Executive Officer Jorma Ollila said yesterday on a conference call in Helsinki. The company, the world's biggest mobile-phone maker, previously reported that China accounted for almost 7 percent of its 29.5 billion euros ($36.5 billion) in sales last year. The Hang Seng China Enterprises Index, which tracks 37 mainland companies listed in Hong Kong, or H shares, jumped 2.6 percent to close at 4292.55. Trading was halted at midday today because a typhoon was approaching the city. PetroChina Co., China's biggest oil producer, rose 2 percent to HK$3.75.
Interest Rates
``Economic growth is slowing so the market doesn't have to worry about an interest rate increase,'' said Stella Lau, who helps manage more than $1 billion at East Asia Asset Management in Hong Kong. The People's Bank of China's benchmark one-year lending rate is currently 5.31 percent. The yield on China's benchmark government bond maturing in 2010 fell 2 basis points to 4.66 percent at 3:00 p.m. in Shanghai. That's down from a high of 5.03 percent on May 11, reflecting reduced investor expectations that rates will be raised. Even as economic growth slowed, the National Bureau of Statistics said inflation accelerated last month to an eight-year high of 5 percent because of rising food prices.
Consumer prices dropped 0.7 percent from May, based on figures that aren't seasonally adjusted, and the bureau forecast the inflation rate will start to drop next month. The rising trend in prices ``will be weakened starting in August,'' said Zheng Jingping, a spokesman at the National Bureau of Statistics, said at a press conference in Beijing. ``The slowdown in investment in fixed assets will have a big impact on the overall economic growth for the year.''
Big Consumer
Fixed-asset investment, which accounts for about half of China's economy, increased 29 percent to 2.61 trillion yuan ($315 billion) in the first half, less than the first quarter's 43 percent gain, today's statement said. Investment in real estate rose 29 percent to 492 billion yuan in the first half, having surged 41 percent in the January-March period. The government said previously it aims to slow economic growth to 7 percent this year from a seven-year high of 9.1 percent in 2003. Growth will probably ease to 8.2 percent this quarter and 8.8 percent for the full year, the Bloomberg News survey showed. ``Let's remember that 7 percent is still a pretty fantastic GDP growth rate so even if they get it cooled to that level, China will continue to be a big consumer,'' said Alexander Cutler, chief executive officer of Eaton Corp., the world's No. 2 maker of hydraulic products. The company has 10 ventures in China, which primarily manufacture for the local market.
Lending Curbs
China's economic growth rate for the second quarter partly reflected the impact of the severe acute respiratory syndrome outbreak a year earlier, which kept consumers at home and tourists away. The statistics bureau revised its estimate for economic growth in the April-June period of last year to 7.9 percent from 6.7 percent previously, saying SARS had less of an impact than they previously estimated. Zhang Yingxiang, head of the bureau's press office, said the full-year growth figure may be revised when China's statistical yearbook is published in September. ``The government's numbers probably at this point are not as reliable as we would like,'' said Andy Xie, Morgan Stanley Asia Ltd.'s chief economist in Hong Kong. ``The Chinese economy is beginning to slow, we don't know how fast though.''
The slowdown comes after Wen in April and May told banks to restrict loans to industries including real estate, autos and aluminum, and the central bank raised the amount of money lenders must set aside as reserves.
Auto Loans Stop
Growth in M2, the broadest measure of China's money supply, last month fell within the People's Bank of China's target for the first time in 1 1/2 years, industrial production growth slowed for a fourth month and car sales had their smallest gain in two years, reports showed. Banks have ``almost completely halted'' auto lending, said Kenneth Hsu, vice president of public affairs for Ford Motor (China) Ltd. in Beijing. That's hurting sales of low-end models such as the company's Fiesta, whose buyers are more reliant on bank financing, he said. Demand for foreign-made goods is still rising. China's imports in June rose by half, their biggest gain in more than a decade, and retail sales surged 14 percent. Per capita disposable incomes in urban areas, home to a third of the nation's 1.3 billion people, rose 12 percent to 4,815 yuan in the first six months. Rural incomes gained 16 percent to 1,345 yuan. Rising incomes and manufacturing wages less than one- twentieth those in the U.S. are prompting companies including Siemens AG and General Motors Corp. to expand their factories in the world's most-populous nation.
Mobile Phones
``We appreciate what the government is doing,'' said Peter Borger, president of Siemens Shanghai Mobile Communications Ltd., a unit of the world's fourth-largest handset maker. ``We still believe in this market and we will continue to invest.'' China added about 1.4 million new mobile-phone subscriptions a week in the first five months of this year, and the number of accounts reached 301 million at the end of May -- equal to the populations of Germany, the U.K., France, Italy and Spain combined. In the past three days alone, companies including Tesco Plc, Britain's biggest supermarket operator, Volkswagen AG, Europe's largest carmaker and Itochu Corp., Japan's third-largest trading company have all announced plans for new investments in China. Foreign direct investment in China rose 12 percent from a year earlier in the first half and the government predicts this year's tally will at least match the record $53.5 billion the country received in 2003. China last year overtook the U.S. to become the world's top recipient of foreign investment.
Surging Exports
Robert Subbaraman at Lehman Brothers Japan Inc. estimates half of China's exports, which rose 47 percent to a record $51 billion in June, are produced by foreign-owned factories. China's official urban unemployment rate held at a 23-year high of 4.3 percent in the second quarter, today's report said. Inflation averaged 3.6 percent in the first half, driven by a 9.5 percent gain in food prices. Prices of clothing, household appliances, vehicles and telecom products all fell. For the first half as a whole, the economy grew 9.7 percent, today's report said. ``It's hard to call what is happening in China a slowdown by any economic definition,'' Phil Gramm, UBS Investment Bank's vice chairman and a former U.S. senator, said in an interview in Beijing, where he is attending the World Shipping (China) Summit. ``China today is the most vibrant country economically in the world.'' ///www.bloomberg.com