Industrial Production Slows Down in China

While fiscal and monetary stimulus and resilient private demand have supported production growth over recent months, China’s industrial production decelerated on an annual basis in December, with year-on-year growth slowing to 18.5% from 19.2% in November, according to the National Bureau of Statistics.


Alaistair Chan, associate economist at Moody’s, explains that the number is an above-trend rate, which is reflective of strong domestic demand and a lowstatistical base effect as production slumped last winter.


For the fourth quarter of 2009 industrial production was up 18% compared to the same period of 2008.


For 2009 industrial production growth eased to 11% from 12.9% in 2008. This was the slowest pace of industrial expansion since 1999.


Based on a breakdown of growth in 2009 by enterprise type, production by state-owned and state holding enterprises grew 6.9%, output by collective enterprises rose 10.2%, share-holding companies’ production grew 13.3%, while production by enterprises funded by foreign investors grew 6.2%.


"Industrial production growth cooled marginally in December, although this is partly a statistical artefact," notes Chan, adding that China’s production hit a low in November 2008, and the peak in year-on-year terms was likely a year later. "The growth numbers will trend lower in coming months for this reason, but also because production is genuinely slowing."


In a commentary, Chan writes that the government’s efforts to stem overcapacity will work to slow production growth. Citing figures from the Chinese Academy of Social Sciences, Chan says 21 out of 24 industrial sectors are seeing overcapacity. He sayd that the government will force consolidation in some, such as steelmakers. Motor vehicle sales will be dampened by a partial phasing out of a tax break in 2010, and this will hurt production, says Chan. Similarly, general weakness in demand of products such as refined copper mean production in those sectors will slow.


"The biggest reason to expect slower industrial production growth is that slower bank lending for 2010 will slow fixed investment and industrial production," remarks Chan. He adds that production remains overwhelmingly dependant on government stimulus measures, given that exports are still recovering. "Fixed investment data has show a slowdown in growth for a number of months already, and this will filter into weaker industrial production."


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