China's 3rd-Quarter GDP Drops Sharply

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By Ariana Eunjung Cha
Washington Post Foreign Service
Tuesday, October 21, 2008

SHANGHAI, Oct. 20 -- China's growth decelerated sharply in the third quarter of this year to 9 percent, raising fears that the global financial crisis could significantly weaken one of the world's fastest-growing economies.

Economists had expected China's exports to be affected by the slowdown in the United States and Europe. But the extent to which other parts of its economy had deteriorated -- such as industrial production, government revenue and imports -- was unexpected. This is the first time in more than five years that the National Statistics Bureau has recorded a single-digit growth rate in the gross domestic product.

China's leaders moved quickly to reassure a nervous public, pledging a series of new measures, from boosting the supply of affordable housing and spurring lending to buying newly harvested grain. The intent behind the moves is to rev up the economy and protect it from the slowdown elsewhere.

Some economists, however, said they were still bracing for the worst -- not only for China but for other Asian countries to which it is tightly linked.

"China's growth miracle has finally ended," said Sherman Chan, an analyst at Moody's

On Monday, a number of economists revised their GDP forecasts for 2009 downward to an unusually low level for China. J.P. Morgan dropped its estimate from 9.5 percent to 8.7 percent, and Merrill Lynch from 9.3 percent to 8.6 percent. Morgan Stanley kept its growth estimate at 8.2 percent.

Chan said she is concerned that if China's growth falls below 8 percent, it "would be equivalent to a recession in advanced economies" because that pace is needed to support the labor market.

As the subprime mortgage crisis that began in the United States 14 months ago spread around the globe, China's economy seemed poised to be the only major economy that was not seriously affected. Recently, however, there have been signs that it, too, is being hit by the crisis. Tens of thousands of factories have closed and its stock market has lost billions of dollars.

Economists struggled with how to explain Monday's surprising numbers.

Wang Qing, chief China economist for Morgan Stanley, suggested that the slowdown in GDP was partly psychological and that the global crisis affected Chinese producers in a way that was disproportional to the real decrease in demand.

"Our interpretation is that Chinese producers have been running down their inventory in anticipation of decreased demand because of the global recession. So they basically pulled down their production and inventory," Wang said.

He said he was most worried about the real estate sector. Skyrocketing prices had led the government to curb lending last year, but now the situation has reversed so severely that whole city blocks are full of unsold apartments.

Another analyst, Ting Lu of Merrill Lynch, said the third-quarter figures also took a hit from some temporary issues such as the 2008 Beijing Olympics and the national holiday, which took place in October. He said in a research note that he expects that the "real challenge is in 2009 as some major economies fall into recession."

Ahead of the announcement of the economic figures, China's State Council over the weekend issued an outline of the government's policy priorities for the rest of the year. These include introducing a broad-based approach to boost economic growth -- encouraging imports and increasing rebates of products sent abroad, spending on infrastructure and incentives for companies to make technological innovations.

National Statistics Bureau spokesman Li Xiaochao said in announcing the new GDP numbers Monday that the figures had some bright spots. Inflation slowed to 4.6 percent, a 15-month low, vs. 8.7 percent in February. Retail sales were up, as was fixed investment.

On the other hand, Li added, the situation did not seem to have reached its low point yet. "There are no signs of a definite recovery from the financial crisis," Li said.

Researcher Crissie Ding contributed to this report.

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