Updated: 2005-08-03
Steel price cuts, slower growth in oil demand and a survey showing that raw material shortages are easing provided new evidence Tuesday of a slowdown in China's breakneck economic growth.

In a move that analysts blamed on oversupply, state media said Wuhan Iron and Steel Co. Ltd., the listed arm of China's third-largest steel maker, would cut some product prices in September for the second time in less than two months.

The latest cuts, in an increasingly oversupplied market, were meant to bring domestic prices in line with global rates, the official Shanghai Securities News said.

"The Chinese economy has started to slow due to excess capacity. The rapid investment-led boom of the last five years has borrowed growth from the future," Andy Xie, chief Asian economist at Morgan Stanley, said in a note to clients.

The next stage of the slowdown, which could last two years, would involve the liquidation of surplus property developed in anticipation of speculative demand that had now dried up, Xie said.

There would also be further commodity price declines as investments in new steel mills, container ports and the like were scaled back, he said.

A Commerce Ministry survey painted the picture of an economy in which completed investments are rapidly coming on stream just as demand weakens marginally.

Looking at 300 kinds of production materials, such as coal, steel and cement, the survey found that only 7 percent of them would have higher demand than supply in the second half of the year, the China Securities Journal cited the survey as saying.

The proportion in the first half of the year was 23 percent.

Power switch

Economists said the sharp slowdown in China's oil import growth was partly explained by the growing availability of coal, fewer shipping bottlenecks and weakening energy demand in general.

The Commerce Ministry's survey showed China was likely to have a crude oil shortfall this year of 2.6 million barrels per day. That implied a 6 percent increase in crude imports this year, well down from last year's 35 percent surge.

Xie said China's need to import petroleum products to produce electricity was vanishing as its generating capacity -- 83 percent based on coal and 15 percent on hydro -- caught up with demand, reducing the need for factories to run diesel generators.

Indeed, capacity under construction was so vast that China could find itself with a power-generating surplus as early as next year. "We believe China's overall imports of crude and petroleum products will decline in both 2005 and 2006," he said.

Because inputs are increasingly plentiful, the Commerce Ministry's survey expects annual price inflation for production materials will slow sharply to just 4 percent for the whole year from a rate of 13.6 percent in the first half.

A lively debate is unfolding among economists whether this industrial overcapacity will lead to the return of deflation, which dogged China in the late 1990s and in 2002.

With annual consumer inflation down to just 1.6 percent in June from 1.8 percent in May, economists are nervous that China's revaluation of the yuan will amplify the disinflationary trend.

The State Information Center, a top government think-tank, is forecasting that the 2.1 percent revaluation could cut consumer price inflation by 0.4 percentage point by the end of 2006.