Politics and Economics

Output cuts spark fears over China economy

Signs are growing that China’s economy could be cooling quicker than expected, with a string of big industrial companies announcing production cuts over the past week.

The cuts have come as anecdotal evidence from other companies suggests a surprising weakening of demand in October amid the global financial crisis and a local housing market slowdown.

Aluminium Corporation of China, the country’s biggest producer, said last week it would cut production by 18 per cent and a senior executive was quoted in local media on Monday saying further cutbacks were possible.

Jinchuan, China’s biggest nickel producer, said on Tuesday it was cutting its production target for this year by 17 per cent, while several copper smelters have made large cutbacks over the past two weeks.

Metals and mining companies around the world have had to rethink production in recent months because of falling prices and weakening global demand. However, companies in China have also faced reduced orders from construction companies as house prices have dropped.

Analysts from Macquarie Securities said that in Tangshan, a big steel-making centre in north China, most mills were running at 30-50 per cent of normal capacity and many small iron ore mines had ceased production.

“Orders for cars and home appliances have already begun to shrink,” Xu Lejiang, chairman of Baosteel, China’s biggest steelmaker, said last week.

Zhou Xizeng, analyst with Citic Securities, said steelmakers were trying to adjust rapidly to uncertainty about demand and an inventory build-up. “The recent drop in production is a sort of psychological panic,” he said.

Executives in a number of other industries also said demand had been unusually weak in recent weeks.

But some executives said the slowdown could also reflect shorter-term factors such as customers reducing their inventories because of global uncertainties.

“We had been expecting this to pick up a bit after the end of Olympics restrictions on factories, but things have been very quiet,” said the chief executive of the China operations of a large paints company. “We are trying to work out how much is due to weak demand and how much to destocking.”

Economists are predicting growth next year of 8-9 per cent, down from nearly 12 per cent in 2007. Several have downgraded their numbers in recent weeks and more cuts are expected.

“In September and October, there has been an acceleration in the slowdown in consumption and in exports that has not yet showed up in the official data,” said Stephen Green, economist at Standard Chartered in Shanghai.

Despite fears of a sharp slowdown, a number of companies remain upbeat about growth prospects in China. “I do not see this as the start of a significant decline,” said Nick Reilly, president of General Motors Asia.

Paul French, a retail industry consultant in Shanghai, said the holiday week in early October had been strong for retailers. “For now, things seem to be all right for retailers but when the market does slow, it does so very quickly,” he said.

Local sentiment may be boosted by the central bank’s willingness to trim interest rates repeatedly, as demonstrated by Wednesday's move to cut the benchmark one-year deposit rate from 3.87 per cent to 3.60.

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