By staff reporter Zhang Hong

China’s GDP grew 9 percent in the third quarter, the slowest growth the country has seen since 2004. If fourth quarter growth holds steady, which seems like the best it’ll be able to do, this year will likely mark the first time China has tracked single-digit growth since 2003, according to Shen Minggao, Caijing’s Chief Economist.

In an attempt to forecast China’s economic growth for the rest of the year, Shen reviewed the course of the downturn so as to determine the most reliable reference for the projection.

China’s growth started slowing down in the latter half of 2007, after reaching a record high of 12.6 percent in the second quarter. The cool off was intentional. Chinese policymakers had decided that the economy was overheated and raised interest to dampen soaring prices. Tax rebates for exporters were also cut to discourage cheap, overseas sales.

In addition to slowing the GDP, another effect of these adjustments was a decline in China’s net exports – that is, export minus import – as tighter policies were joined by weakening overseas demand and steeply rising oil and raw material costs.

But those seeking to correlate the net export change with the growth rate could be confused. As Shen examined the statistics and found that consumption and investment, the other two engines driving GDP, both accelerated in the first three quarters of 2008. Therefore, the net export should have dropped dramatically in the third quarter for the GDP to have fallen as it did. But this was not the case; instead, the net export increased by 3 percent in the third quarter.

The reason for the discrepancy is that, rather than the commonly used “expenditure” approach of summing up consumption, investment and net export, as in the case of the U.S. estimation, the Chinese authority uses a method called “production” approach. As such, GDP growth is largely determined by growth in industrial production.

The implication is that China’s officials must focus more on gross export, rather than net export, if they want vigorous GDP growth. This is because import has little to do with the industrial production.

Reviewing the factors that have hampered growth in 2008, there were not only economic causes, such as tightened macro policies and softened external demand, but also non-economic causes that included the February snow storm that buried half of China, the May earthquake that killed tens of thousands of people in the Southwest provinces, the obligatory suspension of construction and restrictions on traffic during the August Olympics, and the recent milk scandal, which has cast suspicion on China’s entire food industry.

Now that the policymakers have reversed their earlier stance and cut interest rates three times in six weeks – the latest cut was made October 29 – the biggest risks are external. As demand shrinks, exporters’ margins also contract, forcing hundreds of them to cease production.

Another looming concern is the emerging over-capacity. As factories decide to leave workers and equipments idle rather than work at risk of producing more than can be sold, the industrial output could shrink further. One can look at inventory for a clue. If inventory accumulates faster than normal, factories could hold back production in response.

Shen found that the inventory build-up of 33 products has accelerated since May, most significantly for up-stream industries like metal and industrial chemical producers. In contrast, excess stock of consumer goods such as apparels have maintained steady growth. While reported increases in retail sales of consumer goods might have spurred manufacturers to utilize their full capacity, aggregate demand is still withering, putting more pressure on up-stream producers. Moreover, unlike up-stream producers, which are usually owned by the state, down-stream sectors are mostly private and thus have very limited access to bank loans, especially now, as banks have grown nervous about defaults and are favoring state-backed borrowers.

Despite upside factors like loosening policies and dropping energy and material prices, downside risks remain strong, as the U.S. and European economies continue to sink. China’s exports are set to slide further. Life might be particularly tough for labor-intensive sectors that have traditionally tapped foreign markets. Shen worries there could be more factories going out of business in the quarters to come.

Governments are likely to invest in infrastructure and construction to beef up growth. However, the impact of these investments won’t take effect any time soon. Shen has insisted that greater efforts be made to stimulate personal consumption, a more reasonable and agreeable adjustment to China’s economy mode. Prior to that, it is essential to rebalance the distribution between the state and the private sector, that is, to keep more money in people’s pockets rather than the state coffer.