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Originally published Thursday, July 12, 2012 at 12:24 AM

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China's economic slowdown painful despite stimulus

China's economic slowdown slammed into Li Fangliang, cutting sales at his Shanghai auto parts store by half.

AP Business Writer

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BEIJING —

China's economic slowdown slammed into Li Fangliang, cutting sales at his Shanghai auto parts store by half.

"There are just fewer and fewer customers," said Li, who has avoided layoffs among his four employees. "I plan to start a shop online to find new markets."

From shopkeepers to shipbuilders, some areas are feeling more pain from China's deepest slowdown since the 2008 global crisis than still-robust headline growth of about 8 percent might suggest. Higher spending by state industry and government-directed investment is pumping up the world's second-largest economy, but that is masking the fact that the private sector is cutting jobs and scrambling to prop up plunging sales.

Data due out Friday are expected to show growth in the three months ending in June fell as low as 7.3 percent, down from the previous quarter's nearly three-year low of 8.1 percent. That is in line with this year's official 7.5 percent target. But revenues for companies in construction, shipbuilding and export manufacturing are down by up to half compared with a year ago.

The slowdown is a setback for economies around the world that were looking to China to drive demand for exports and support global growth.

"Domestic demand remains weak," said JP Morgan economist Francis Fu in a report. "Corporate profits have continued to decline and incentive for business investment is low."

Other industries including cargo handling and manufacturers of shoes, clothing, optical fiber and wind turbines are suffering lower profits or losses and cutting jobs, according to Chinese news reports.

Job losses could fuel political tensions, eroding economic gains that underpin the Communist Party's claim to power. The party is trying to enforce calm ahead of a handover of power to a younger generation of leaders this year. Though China's growth even now is higher than those of developed economies, many industries depend on a much faster expansion to propel demand for new factories, cargo ships and other goods.

Construction, which supports millions of jobs, was plunged into a deep freeze by limits imposed on home purchases to cool surging prices. Demand fell further as companies facing weak sales put off building new facilities.

"A lot of building projects are half-finished and forced to stop. I think it is even worse than 2008," said a manager for Hangzhou Yuanlong Construction Co. in the eastern city of Hangzhou. She would give only her surname, An.

The company, with 20 employees and four teams of independent construction contractors, is owed 2 million yuan ($300,000) by cash-strapped customers and is having trouble collecting, An said.

"Our boss is looking for new opportunities," she said. "Otherwise we are not going to survive."

In Guangdong province in the southeast, a leading export manufacturing region that has been battered by the fall in global demand, the slowdown was "more severe than expected," the official Xinhua News Agency cited Governor Zhu Xiaodan as saying.

Guangdong's economic output in the first half grew 7.4 percent over a year earlier, below the official target, Zhu was cited as saying Wednesday.

Beijing has cut interest rates twice since early June but economists say companies are reluctant to take on more debt. Authorities have reduced fuel prices and are injecting money into the economy through higher spending on low-cost housing and other public works. That will channel money into government-owned construction companies.

On Thursday, China's main government pension fund added its financial firepower to the construction campaign, announcing 1 billion yuan ($159 million) in financing for a public housing project in Wuxi, a city northwest of Shanghai. The National Society Security Fund said it will finance other housing projects but gave no details.

Some economists suggest the decline might be more severe than reported, citing rumors that utility companies have been told to make the economy look healthy by inflating electricity consumption data - a key indicator of industrial activity.

Yu Bin, a Cabinet researcher, rejected those suggestions at a briefing Thursday. He said the slowdown in richer east coast cities such as Beijing and Shanghai is being offset by stronger growth of up to 10 percent in less-developed central and western regions. Companies are investing more there as incomes and consumer spending rise.

"If you go to western parts of China, the growth rate is quite high," said Yu, director of macroeconomic research for the Development Research Center.

In any case, opportunities in the traditional powerhouses of China's economy appear to have dried up.

"A lot of people want to go work in big cities, but there is far less demand this year," said a manager at the Tongxu County Enterprise Bureau, an employment service in the central city of Kaifeng in Henan province. He refused to give his name.

"A lot of workers from big cities are starting to return home because their employers can't pay their salaries," the man said.

Beijing is pinning its hopes on investment, especially by state industry, to drive a rebound. Premier Wen Jiabao said this week that sustaining investment was most important at this point - an acknowledgement that efforts to boost consumption and exports are failing to gain traction.

State industry has been sustained and even expanded by credit from government banks. Two major steel producers have received permission to build a pair of mills costing a total of more than $20 billion, financed by state-owned lenders. Wen has promised more credit to private businesses but entrepreneurs say they get little help.

Facing weak export orders, manufacturers are cutting payrolls and reducing purchases of components and raw materials. Import growth in June fell by half from the May level to 6.3 percent, reflecting low industrial and consumer demand.

With trade plunging, Chinese shipyards have been battered because shippers are putting off purchases of new vessels. The industry employs hundreds of thousands of workers and is the world's biggest by total tonnage produced.

Orders for new vessels fell by half in May from a year earlier, according to the China Shipbuilding Association. A spokesman who would give only his surname, Qian, said shipyards have been forced to cut prices by 20 to 40 percent.

Major shipyards in Shanghai, the industry center, say they are still profitable but news reports say smaller yards in surrounding provinces have laid off employees or closed.

"I'm sure some companies may face suspension of production or even closure," Qian said.

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Associated Press researchers Fu Ting in Shanghai and Flora Ji and Yu Bing in Beijing contributed.

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