Weather Hurts China's Factory Output

A Chinese worker walks near steel bars at a market in Shenyang, northeastern China's Liaoning province Sunday April 15, 2007. China will cut export tax rebates on steel, an industry group announced last week, amid pressure on Beijing to rein in rapid growth in exports.(AP Photo) ** CHINA OUT **

The slowdown coincides with a more rapid appreciation of the yuan in the past few months, which together with a global economic slowdown could dent overseas demand for made-in-China goods.

The People's Bank of China let the yuan rise as high as 7.0950 per dollar on Thursday, the loftiest level since it unhooked the currency from a dollar peg in July 2005.
"The latest fall is obviously weather-related to an extent, but if you look at the trend, it's been falling over the past few months relative to last year.

We're off the peak of the cycle," said Dwyfor Evans, an economist at State Street Global Markets in Hong Kong.

"What does it reflect? A combination of factors -- the global slowdown and the monetary tightening that we're seeing in China and the shift towards curbing bank lending."

Beijing, battling nearly 12-year-high consumer inflation alongside rapid credit and money supply growth, would welcome a modest slowdown in production, at least in sectors that consume significant resources.

Output grew by 18.5 percent last year, the fastest pace since 1993.
Clouded by Weather
Seeking to keep the economy from overheating, the central bank has raised interest rates six times since the start of 2007 and banks' required reserves 11 times, to a record 15 percent.

Some economists expect the People's Bank of China to raise banks' required reserves again soon to keep excess cash in the financial system from feeding into further price rises and wasteful investment.

Authorities have also ordered banks to restrict lending, especially to energy-intensive or polluting industries.
The data released by the National Bureau of Statistics on Thursday showed that cement output in the first two months dropped 2.8 percent from a year earlier, compared with double-digit growth much of last year.

Cement is one of the targets of the credit clampdown, but it was also probably affected by power shortages and transport snarls resulting from the snowstorms.

"The effort to put a brake on the economy actually seems to be bearing fruit," said Evans.

"It's going to be very difficult, though, to make firm conclusions on the data for the first couple of months, simply because of the weather."

Hong Liang and Yu Song with Goldman Sachs in Hong Kong calculated that on a seasonally adjusted, quarter-on-quarter basis, industrial production growth actually accelerated in the first two months from December.

The statistics agency issues a joint figure for the two months to smooth out the effects of the Lunar New Year, which falls at different times each year. Many factories close during the long holiday.

"With heightened inflation risks, we expect further tightening measures by the government coupled with a gradual softening in exports will likely lead to downward pressure on industrial activities in the coming quarters," Liang and Song wrote in a note to clients.