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China's Factories Move Down a Gear in July

Reuters
Wednesday, 15 Aug 2007 | 1:21 AM ET

China's industrial output slowed more than expected in July after tax changes made exports less attractive, suggesting to some economists that the country's politically sensitive trade surplus may shrink in coming months.

Factories churned out 18.0% more goods than in July 2006, down from 19.4% growth in June, the National Bureau of Statistics said on Wednesday. Economists had expected a rise of 19.2%.

"The surprising slowdown in industrial output was partly caused by the reduction in export tax rebates," said Zhao Qingming, an economist with China Construction Bank in Beijing.

China scrapped or cut tax rebates, effective on July 1, on nearly 3,000 export lines, including metals and textiles, to help reduce its record trade surplus and discourage companies from making low-value, energy-intensive goods.

Export growth in fact accelerated in July, but economists said this was due to companies shipping goods that had been ordered before the tax changes were announced.

But with China's official survey of manufacturers showing declines in overseas orders and industrial output for three months in a row, many economists believe exports will lose steam over the rest of 2007.

"As manufacturers expect export growth to decline, they are now cutting their production a month ahead of time," said Gene Ma, chief economist with an independent research house in Beijing.

Ma said China could feel the sting of the stresses in the U.S. subprime mortgage market if it saps U.S. economic growth and thus reduces demand for Chinese goods.

Mingchun Sun, an economist at Lehman Brothers in Hong Kong, agreed. "Given the turmoil in global financial markets and uncertainty in the global economic outlook, Chinese exports may be facing tougher times in the future," he said. "Because of the comparative advantage of Chinese exports, the export growth won't slow down too much, but it should go back to around 20% instead of 30%," Sun added.

Rainstorms across much of China that triggered floods, landslides and other disasters probably contributed to the dip in output, economists said.

Ma with the China Economic Business Monitor said Beijing's campaign for a greener economy might also be having an effect, noting slower growth in output of power, cement, steel and iron.

Still, economists said they did not expect an abrupt drop in factory output as overall global demand was still strong, investment spending remained high and household spending was accelerating.

In the first seven months of the year, industrial output was up 18.5% from the same period last year.

China has contributed more than the United States to global growth so far this year for the first time, according to the International Monetary Fund.

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