December 19, 2008 / 7:44 AM / 10 years ago

UPDATE 1-RBS slashes China '09 GDP growth forecast to 5 pct

(Adds industry minister comments, background)

By Jason Subler

BEIJING, Dec 19 (Reuters) - Royal Bank of Scotland on Friday slashed its forecast for China’s 2009 gross domestic product growth to 5 percent, from 8 percent, warning about the potential for increasing social tensions as the economy falters.

Exceptionally weak activity data for November, released over the past week, has prompted a number of investment banks as well as the International Monetary Fund to either revise down or warn of possible downgrade to their China growth estimates.

But the RBS forecast, based on expected sharp drops in household consumption, residential investment and exports, is now the lowest of the major banks.

Forecasts in a Reuters poll published last week and conducted before the release of November data centred on a growth rate of 8 percent. [ID:nPEK349561] The economy expanded by 9 percent from a year earlier in the third quarter, compared with 11.9 percent in all of 2007.

“It is not a recession, but it will feel like one to the average citizen and will feel like a depression to the 100 million or so migrant workers, many of whom are out of a job and stranded far from home,” economists Ben Simpfendorfer and John Richards said in a note to clients.

“Social tensions are likely to be on the rise.”

Beijing would be alarmed about any slowdown of that degree, as it would not enable the economy to produce enough jobs to soak up the millions of people seeking to enter the workforce each year, potentially feeding into social unrest.

Policy makers are targetting an 8 percent pace, which is considered necessary to generate enough new jobs, though record low factory output expansion and negative export growth in November suggest that task may prove difficult.

The government has launched a series of measures to counter the slowdown, including a massive stimulus package, repeated interest rate cuts and measures to support the property market.

Beijing will need to ensure that industrial output expands by 12 percent next year to hit its GDP target, Li Yizhong, Minister of Industry and Information Technology, said on Friday.

Factory output expanded by 5.4 percent in the year to November, the weakest pace for a non-holiday month on record.

Li warned that it had not yet bottomed out, suggesting that the target for industrial production may be difficult to attain.

“Industrial growth is slowing significantly and downside pressures are increasing,” Li told a work conference, which was webcast on the ministry’s website (www.miit.gov.cn).

The ministry is looking into a range of measures to help industry, Li said, including further adjustments to import and export taxes, more loans especially to smaller firms, and increased government purchases of raw materials for its reserves.

He added that the global financial crisis would deepen further and would affect the country’s investment growth in the coming two years and beyond.

Simpfendorfer and Richards said they assumed GDP growth would fall to as low as 4 percent from a year earlier in the first half of next year, before recovering in the second half as a result of fiscal easing and the base effect.

IMF Managing Director Dominique Strauss-Kahn said earlier this week that the IMF could cut its 2009 China growth forecast to around 5 percent in its next revision, from 8.5 percent. [ID:nLF40653] (Additional reporting by Langi Chiang; Editing by Kazunori Takada))

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