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John Garnaut, Beijing
April 16, 2009 – 5:31PM

Update China has posted the lowest annual GDP growth in at least 17 years thanks to a 20% contraction in exports during March quarter.

But China still recorded growth of 6.1% despite economic contraction across the world as the government’s stimulus flowed through to higher investment in roads, railways, power generators, mining and real estate.

Fixed asset investment, which makes up more than two-fifths of Chinese GDP, surged 28.6% in the year to the March, up from 26.5% in the previous two months.

Railway construction has more than tripled since a year ago.

The surging investment has been fuelled by direct government spending and a government-driven explosion in new lending which, in turn, has lifted demand for cement, steel and other industrial products.

The closely watched industrial production figure rose from 3.8% growth in the year to January/February to 8.3% in the year to March, as flagged earlier by Premier Wen Jiabao.

And the rising industrial production has boosted commodities markets across the world in recent months, including exports from Australia.

”Major infrastructure projects are being implemented at an accelerated pace,” wrote Jing Ulrich, China economist at JPMorgan.

But Ms Ulrich said private sector real estate construction will remain subdued as the market works off excess supply.

Australian impact

News of slower economic growth in China pared gains on Australia’s stock markets and sent the Australian dollar briefly lower as investors assessed the effects on Australia. China may overtake Japan this year as the country’s largest trading partner.

Slower Chinese growth ”provides stark evidence of the impact of the global recession on the mining boom which supercharged Australia’s economy in recent years,” Treasurer Wayne Swan said in statement.

”The simple fact is that a global recession, and deep downturns for our key trading partners, make it certain that our own forecasts for growth and revenue in the budget will be substantially worse than in UEFO (Updated Economic and Fiscal Outlook released in February),” Mr Swan said.

Holding up

China’s growth, though, remains among the fastest in the world.

“The overall national economy showed positive changes, with better performance than expected,” Li Xiaochao, spokesman for the National Bureau of Statistics, said at a news conference.

Still, Li said the drop in exports was leading to falling corporate profits, reducing government revenues and increasing difficulties in creating jobs.

Economist Ray Attrill of 4Cast said China’s economy showed signs of holding up despite the slowdown.

”Industrial output was up 8.3% on the year (in March), which was a fair bit better than economists were looking for,” he said. ”And fixed asset investment is pretty strong.”

Both of those are the sub-components of GDP that have the most impact for the Austalian economy, he said, because ”both are linked to demand for resources.”

”In both those respects we’ve actually got pretty strong numbers.”

Investment in fixed assets grew 28.8% year on year, the National Bureau of Statistics said. Industrial output was 5.1% higher for the first quarter as a whole, implying production quickened last month.

Stimulus efforts

China’s economy shows signs that Premier Wen Jiabao’s 4 trillion yuan ($815 billion) stimulus plan is working, fueling a surge in bank lending and spurring the Shanghai Composite Index to an eight-month high. The State Council said yesterday that it will cut export taxes for some electronics products and offer cheaper credit to manufacturers to spur shipments overseas.

”The recovery is still at a very fragile stage,” said Yu Song, an economist at Goldman Sachs Group Inc. in Hong Kong. ”The tug of war between upside risks from domestic investments and downside risks from weaker external demand will continue.”

Today’s report coincides with a statement from US Treasury Secretary Timothy Geithner that China isn’t a currency manipulator. His stance eases pressure on China to allow its currency to rise, hurting efforts to revive exports.

From July 1 to the end of last year, the yuan rose just 0.4% against the US dollar. Its value has been little changed since the beginning of the year, closing yesterday at 6.8325 per US dollar.

Global Recessions

China’s expansion lagged behind its 9% growth for all of 2008 and 13% gain in 2007. It also contrasted with recessions in economies around the world. The Organization for Economic Cooperation and Development predicts a 6.3% expansion for China this year, compared with a 4% contraction in the US and a 6.6% decline in Japan.

There are signs that other economies may have seen the worst. The Federal Reserve said yesterday the US contraction slowed across several of the nation’s biggest regional economies last month. In Japan, economists from Morgan Stanley and Macquarie Securities Ltd. increased their GDP forecasts, saying the economy would contract less-than-expected after Prime Minister Taro Aso announced a 15.4 trillion yen ($215 billion) stimulus package.

Confidence in the global economy rose to an 11-month high, a Bloomberg survey of users on six continents showed yesterday.

Share market rally

The Shanghai Composite Index of stocks has climbed 39% this year, making it the second-best performer among 88 indexes tracked by Bloomberg.

Some of the statistics in today’s report pointed to a recovery. Industrial production expanded 8.3% in March, compared with 3.8% in the first two months. Urban fixed- asset investment climbed 30.3% in March.

Spending on real-estate development grew 4.1% in the first quarter, up from a 1% gain in the first two months, a report showed this week.

Companies are also reporting how the stimulus package is helping. Beijing-based General Steel Holdings Inc. said its main factory in Hancheng city, Shaanxi province, signed contracts to sell 560,000 metric tons of steel for stimulus-related projects by late March, an amount equal to 30% of total output last year.

Car sales

General Motors, the biggest overseas automaker in China, raised its forecast for the nation’s auto sales this year after the government took steps to spur demand and provided subsidies in rural areas.

China’s GDP in the first quarter was pulled lower by sinking exports as a global recession cut demand for textiles and electronics, prompting thousands of factories to close and leaving more than 20 million migrant laborers without work.

”Exports will continue to drag on growth at least until the final quarter of the year,” said Mark Williams, an economist with Capital Economics in London. If there is a recovery this year, it will ”be lackluster at best.”

Today’s report contrasts with a year ago when the economy expanded 10.6% and Premier Wen said that inflation running at more than 8% was the nation’s biggest problem.

Consumer prices fell 1.2% in March from a year earlier, compared with a drop of 1.6% in February.

Borrowing costs

Cooling inflation provided the People’s Bank of China with space to lower the one-year lending rate by 216 basis points to 5.31% last year and reserve requirements by 2%age points to 15.5% for large banks.

The bank also lifted caps on lending toward the end of 2008. As a result, new loans jumped more than six times to 1.89 trillion yuan in March from a year earlier, raising concern among some economists that the cash flowing into the economy will inflate asset bubbles, and promote wasteful spending.

”The next policy move needs to be taming credit growth and local governments’ investment drive,” said Wang Tao, an economist at UBS AG in Beijing. ”This is needed to reduce the risk of massive resource misallocation, asset price bubbles and damage to the banking system.”

http://business.smh.com.au/business/world-business/china-growth-fizzles-20090416-a84o.html?page=-1

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