China's post-Olympics recovery hopes fading fast

By V. Phani Kumar, MarketWatch

Last update: 4:54 a.m. EDT Sept. 24, 2008

HONG KONG (MarketWatch) -- Hopes of a rapid recovery in the health of the Chinese economy after the Olympic Games are fading fast on weakening commodity as well as property prices, Citigroup said in a report released Wednesday.

"All signs are pointing towards an across-the-board slowdown in the Chinese economy. The particular worrying signs are rapid cuts in steel prices, surging steel exports, deceleration in electricity consumption growth and weakening coal prices," Citigroup Lan Xue wrote in the report.

Lan said an unexpected reduction in steel prices for November announced last week by Baoshan Iron & Steel Co., China's largest steelmaker, suggested steel companies weren't expecting any major rebound in economic activities.

Baoshan last week announced a reduction of 800 yuan ($117) a ton, or more than 10% over October, in the prices of hot-rolled and cold-rolled steel coils for November, according to reports.

"Another sign of weakening demand is the recent surge in steel exporters which has been very evident" since the second quarter, Lan added.

China's economic indicators were expected to show an improvement after the Olympics, after industrial production weakened in the run up to the Games last month, partly because the government shut down several polluting factories in and around Beijing.

Official data released earlier this month showed that the growth in China's industrial output slowed to 12.8% in August from the same month a year ago, the weakest pace in six years. In July, China's industrial production expanded 14.7%.

Lan said "a significant deterioration in the property sector" was believed to be one of the key reasons behind the weakness in domestic demand.

"We have seen quite widely spread month-on-month decline in sales volumes, which could hinder" growth in property development in future, said Lan. "Along with its multiplier impact on the economy, it is very difficult to replace the damage from a slowing property sector."

Other analysts echoed the views on the weakening outlook for the Chinese property market.

DBS Vickers analyst Jasmine Lai wrote that sharp price cuts by property developers and sluggish sales have "increased the risks for a hard-landing in the China property market."

"About one-third of corporate loans are pledged by real estate. Any plunge in property prices may create uncertainties for the banking system. Hence, the timing and aggressiveness of the introduction of government measures to revive the property market is very important," she added.

Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau.