China takes a breather, and global firms gasp

SHANGHAI —  China’s powerful economic machine is losing steam, raising significant concerns for many businesses that are counting on the Asian nation to help them ride out the global financial crisis.

The Chinese government said Monday that economic growth in the third quarter slowed sharply from a year earlier to 9%, the lowest level in more than five years.

China’s economy expanded by 11.9% in all of 2007. But weakening demand for Chinese factory goods from U.S. consumers and the slumping Chinese property market have taken a toll on exports and investments -- two big engines of China’s economy.

“China’s latest economic numbers will be disheartening for observers who hoped that China’s growth would substitute for slowing demand from developed countries,” said Jing Ulrich, managing director of China equities for JPMorgan Chase & Co. in Hong Kong.

Analysts said the pace of slowing was worse than they had expected and would probably spur Beijing to take measures to address the threat of rising joblessness and social instability.

China’s State Council, or Cabinet, issued a statement over the weekend that the government would focus on “rapid and stable economic development” in the fourth quarter, whereas in the past greater or equal priority was given to controlling inflation. Although specific measures weren’t announced, state-run media reported that they would include increased rebates for exporters and support for loans to small and medium-size businesses.

Still, after Monday’s economic report, analysts lowered their forecasts for the fourth quarter. And some economists say China’s economic growth could fall to 7% next year. Although that’s still fast by global standards, it would be a big comedown for China, which has sustained an average annual growth rate of 10% over the last three decades.

“If growth dips below the 8% mark, the economic conditions in China would be equivalent to a recession in advanced economies,” said Sherman Chan, an analyst at Moody’s Economy.com in Sydney, Australia, noting that a rate of at least 8% is generally viewed as needed to support China’s large labor market.

China’s boom in recent years has been a key driver of global economic growth, lifting oil and metal prices, spurring trade in other nations and boosting revenues for foreign firms that have invested tens of billions of dollars annually. Commodity prices already have fallen, hurting big resource-export nations such as Australia.

With the global financial crisis darkening the outlook in the developed world, companies as diverse as General Electric Co. and as focused as Cold Stone Creamery have been pressing ahead with their China expansion plans in the hopes that the world’s most populous country will deliver.

GE recently set up five regional headquarters across China to sell more wind turbines, diesel engines and medical equipment. Cold Stone Creamery plans to open 20 to 25 stores in the Middle Kingdom.

“China will be our No. 1 market we are developing,” said Lee Knowlton, president of the international division of Kahala Corp., the Arizona franchiser of the ice cream brand.

But even before Monday’s economic report, there were signs that corporations banking on China -- including retailers, shipping firms and manufacturers -- may be in for a rude shock.

Tens of thousands of Chinese factories have shut down this year. Two weeks ago, China’s biggest dye producer for the garment industry closed, leaving 4,000 people jobless. Last week, one of the nation’s largest toy makers, a onetime supplier to Mattel Inc. and Hasbro Inc., went out of business, casting away 6,500 workers.

General Motors Corp., which recently broke ground on a $250-million research and corporate park in Shanghai, had been counting on China’s auto market to expand at a double-digit pace this year. But sales fell 6.3% in August from a year earlier, then dropped again last month by more than 2%. That prompted J.D. Power & Associates to halve China’s sales growth forecast this year to 8%. Next year, the Chinese auto market is projected to be flat.

“A decline is not out of the question,” said Michael Dunne, J.D. Power’s managing director in China. “That’s some tough news. China will not compensate for falls in the rest of the world. It’s not going to be the savior.”

The National Bureau of Statistics said Monday that retail sales in China jumped in September by more than 20% from a year earlier -- a pace that’s been consistent all year. But those figures overstate the robustness of consumption, said Ha Jiming, chief economist at China International Capital Corp., a Beijing investment bank. Separate government survey data indicate that urban household consumption rose only 5.7% in the first half of this year, reflecting slower spending and income growth, Ha said.

That’s not surprising given the slump in China’s real estate and stock markets. Shanghai’s composite stock index is down more than 60% from the start of the year, and new home sales in onetime boom cities such as Shenzhen have fallen 50% this year.

Retailers of everyday goods can expect to do better in China, but they too are feeling the strains of a slowdown. Yum Brands Inc., owner of the KFC, Taco Bell and Pizza Hut chains, is adding more than 600 restaurants in China this year, and expansion in 2009 is expected to remain brisk. But sales at restaurants open at least a year were up 5% in the latest quarter, down from an 11% increase in the third quarter of 2007.

Consumer spending accounted for 35% of China’s economy last year, compared with about 64% in the U.S. Beijing wants to spur domestic spending and rely less on exports and investments, which make up about half of China’s economic output. That could spell a cut in taxes and relief for developers and home buyers soon.

China’s central government is also expected to reach into its own deep pockets, plowing tens of billions of dollars into projects such as high-speed rail, gas transmission pipelines and power plants to create jobs and keep businesses busy.

“The government is going to actively and more quickly implement infrastructure development,” said Amy Sommers, an attorney at Squire, Sanders & Dempsey’s office in Shanghai. At the same time, she said, Beijing will be looking to attract more foreign investments in higher-value areas, such as green energy and new technologies for agricultural, environment and industrial use.

That should help companies like GE, which last month signed a strategic partnership with Hubei province, where the capital city of Wuhan is building a subway and expanding its airport. Shanghai, meanwhile, is ramping up for the World Expo in 2010, opening new opportunities for foreign businesses. AEG, the Los Angeles sports marketing firm that owns Staples Center and the Los Angeles Kings, last week announced, with the National Basketball Assn., new arena projects in Shanghai and Guangzhou.

Still, with exports expected to weaken further and joblessness rising, analysts say the slowdown in manufacturing will spread to other sectors of China’s economy, including the transportation and hospitality industries.

“China is very much part of the global economy,” said Andy Xie, an independent economist based in Shanghai, adding that export orders dropped sharply in September.

“For businesses, they have to live with the downturn,” he said. “They can’t dream about some hot spot to bail them out.”

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don.lee@latimes.com