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Economy

Manufacturers scale back production as China's economy cools

Full-year steel production in China is on track to drop for the first time in 35 years.

SHANGHAI -- China's economic slowdown has manufacturers in many fields putting the brakes on output, a trend that could spell more trouble for both China and the global economy.

     Crude steel production slid 1.3% year on year to 410 million tons in the January-June half, government data showed. Full-year production is on track to drop for the first time since the 1980s. Hebei Iron and Steel Group and other major steelmakers have moved to cut output.

     Passenger vehicle production volume tumbled 26.3% on the year in July, a steeper drop than the 11% seen in June. New-car sales volume has declined year on year for four straight months through July.

     Volkswagen started partial output reductions in June amid flagging sales. The German automaker seems to have taken similar steps this month, including extending downtime at some factories. General Motors will probably be forced to downgrade its output forecast.

     Among Japanese companies, Hitachi Construction Machinery slashed the number of operating days at its facilities in Hefei, Anhui Province, by two-thirds and is keeping them running for just two weeks this month. Kobe Steel unit Kobelco Construction Machinery plans to lay off 200 workers at two Chinese plants, or just over 10% of the total, in response to shrinking hydraulic shovel sales.

     The impact could spread to Japanese concerns' domestic manufacturing facilities. Mitsubishi Electric's Chinese elevator orders dropped roughly 15% on the year in the April-June quarter. "The pace of building construction has slowed," said Akihiro Matsuyama, an executive officer.

     Meanwhile, some businesses are stepping up production in China. German chemical giant BASF completed a new resin plant in Shanghai this month, while Japan's Asahi Kasei is doubling production capacity for a paint material in Jiangsu Province. Demand is on the rise for products requiring a high level of technical know-how, such as aircraft.

     "A clear contrast between industries has emerged," said Mihoko Hosokawa, a research executive at Mizuho Bank (China).

     The cuts to production will hurt corporate earnings and reduce employment, eating into consumer spending and putting more downward pressure on China's economy. That will in turn hit the economies of countries that export raw materials and parts to China.

     Beijing is ready to pull out all the stops to keep the bottom from falling out of the economy. The yuan was effectively devalued this month, and the government has approved massive infrastructure investments to revitalize regional economies.

     Still, many expect the trend toward production cuts to continue given a persistent supply glut stemming from sluggish exports and a shortage of domestic demand. Reaching the government's economic growth target of around 7% will be a tricky proposition.

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