Slowdown in industrial sector hits China's rapid growth

The world's second-largest economy, China, experienced a slowdown in its breakneck growth during the second quarter of this year.

Beijing reported that the Chinese economy grew by 10.3 per cent in the three months to June, down from 11.9 per cent in the first quarter.

The figure was anticipated by the markets, given the government's attempts to dampen a speculative bubble in real estate and cool an economy in danger of overheating. However, China is still well on course to meet the official growth target of 8 per cent this year, and way ahead of the established advanced economies.

Much of the slowing is taking place in the industrial sector. June's industrial production growth fell back to an annual rate of 13.7 per cent, from 16.5 per cent in May and 17.8 per cent in April. With the country heavily dependent on exports to the US, Europe and other Western nations, the faltering recovery in domestic consumption in China's overseas markets seems to have hit activity in the new workshop of the world. There has also been some reduction in the pace of stock building.

Wensheng Peng, an analyst with Barclays Capital, said: "We continue to see a policy-driven soft landing in China and believe policy flexibility will support growth if the slowdown turns out to be sharper than policy-makers expect or target. Slower growth, recent moderate food price inflation, weakened commodity prices and effective exchange rate appreciation in the past few months all point to dampened inflation pressures."

In contrast to its fellow Bric power India, Chinese retail inflation appears well controlled. In June, the consumer price index showed prices rising at about 3 per cent, against almost 10 per cent in India, where the authorities are also seeking to slow their economy.

But it is in the real-estate sector where the pressure is building most intensely. Property prices recently dipped, having been surging ahead at rates of 40 per cent a year in some cities. A chaotic bursting of China's property bubble could inflict significant damage on her financial sector and the wider economy.

Brian Jackson, at RBC Capital Markets, said: "Although we expect China to slow further in the second half, we do not expect to see a sharp or prolonged downturn, and we forecast growth to move back toward trend levels in 2011. This in turn suggests that any moderation in price pressures will likely be limited. Other Asian central banks have shown in recent weeks a willingness to look past any near-term dip in growth and proceed with gradual policy normalisation.

"The need to prevent an escalation in trade tensions with the US in the lead-up to mid-term elections in November also suggests that further yuan appreciation is in China's interests. We do not expect today's data will be enough to convince Beijing to reverse tightening measures," Mr Jackson added.

If Beijing wishes to push growth higher and rebalance the economy towards domestic consumption – something that its trading partners have been urging it to do for years – the Chinese authorities have much room for manoeuvre, compared to their Western counterparts. China enjoyed a budget surplus of 953.8bn yuan in the first half of the year – equivalent to 2.8 per cent of last year's GDP.