2010-07-16 [Source: ICIS news]

SHANGHAI--China's economy has started to cool in the second quarter, with the deceleration of growth expected to continue into the second half of the year, likely affecting its demand and production of petrochemicals, analysts said on Thursday.

June-quarter GDP grew 10.3% year on year, according to the National Statistics Board. This represented a 1.6 percentage point decline from an 11.9% growth recorded in the first quarter.

Analysts said they expect the pace of growth to further slow as the year progresses, with third quarter likely logging a 9.8% growth and fourth-quarter expansion seen at 9.4%.

This was largely due to the high base in 2009, when China went all out to boost lending, thus preventing a sharp slowdown in economic activities while the global economy was in recession.

Now faced with possible economic overheating that could fuel inflation, China had started to implement credit curbs late last year directed at the property sector.

"This is a fatal blow on the petrochemical sector, which is mostly used in housing construction," said Liu Yanzhao, an analyst from Shanghai-based Western Securities.

Polyvinyl chloride (PVC), for example, has its main application in the construction sector.

"In the second half, the government will continue to curb the property market to prevent housing bubbles and contain inflation after housing prices in some cities surged sharply last year," Liu said.

Stringent lending requirements were now in place for homebuyers, including a higher downpayment for purchasing second homes.

"People are waiting for property prices to fall. They are [on a] wait-and-see [mode] now, and the real estate developers dare not build more houses. Demand for petrochemicals will naturally fall," Liu added.

The government's energy saving and emissions reduction scheme also had the effect of slowing down investment, industrial production and overall domestic consumption, analysts said.

China was off target in cutting its energy consumption per unit of GDP by 20% over a five-year period from 2006 and 2010, analysts said, with the reduction only pegged at 14.38% in the first four years of the plan.

"This is the last year of the 11th five-year-plan, and the government faced huge pressure to finish the target. So I assume the government will take harsh measures to complete the task, like shutting down high energy-consuming companies, such as steel mills and chemical plants," Liu said.

"Petrochemical production and investment for petrochemical projects will both be affected," Liu said.

China's GDP in the first six months of the year grew 11.1% to yuan (CNY) 17,284bn ($2,553bn), supported by a 17.6% jump in industrial production, according to the NBS.

Investment in fixed assets during the period jumped 25.0% year on year to CNY11,419bn, while retail sales of consumer goods grew a strong 18.2% to CNY7,266.9bn, based on NBS data.

Consumer prices grew an average 2.6% over the January-June period, while wholesale prices jumping 6.0%, according to official statistics. Accelerating inflation since April prompted the government to step up its efforts to curb lending.

New lending in the first half of the year was down a hefty 37% to CNY4,630bn, based on official data.