China companies on pace for deepest spending cuts in six years

BEIJING (Reuters) - Chinese companies are on a pace to cut capital spending by around 7 per cent this year, the biggest annual reduction since the global financial crisis, deepening an economic chill.

Slower spending by companies underscores the challenges that China faces this year in containing an economic slowdown that is set to be its worst in 24 years, and which has been aggravated by a sagging property market.

The cutbacks could persist, indicating that China's economy, which has relied heavily on investment, will need to speed up rebalancing to feed growth.

Economic uncertainty and a government campaign to curtail industries that are either heavy polluters or are stuck with a glut of unsold goods mean that investment could fall next year as well, interviews with companies and analysts showed.

A Reuters analysis of 335 Chinese companies, ranging from drug to machinery makers, shows investment is expected to fall 7.3 per cent this year - or 74 billion yuan ($12.1 billion) - from 2013 levels, according to Thomson Reuters Starmine data.

For many companies such as Yunnan Tin Co Ltd, whose sales and profits have been hit by China's softening economy, being frugal is a matter of survival. Analysts on average expect the firm, which is the world's largest tin producer, to slash capital expenditure by 81 per cent this year.

"We feel that the economic downturn will continue, so it's better to keep our eye on our wallet," said Pan Wenhao, board secretary at Yunnan Tin, which posted a net loss of 1.27 billion yuan last year.

Others are also staying lean in tough times.

A Reuters study showed that cash balances at 726 companies rose 13 per cent in the first six months of this year compared with the year-ago period, as firms curbed investment in the face of uncertainty.

The flight to safety comes as China's economy is forecast to grow at its slackest rate in five years in the third quarter, as slower investment growth and a housing downturn increasingly dampened activity.

Analysts polled by Reuters forecast China's economy likely grew 7.2 per cent in July-September, the weakest since the first quarter of 2009 when the world was smarting from the financial crisis.

Investment has long been a crucial driver of China's economy. It accounted for 54 per cent of growth last year, with private investment making up as much as 63 per cent of the total 43.7 trillion yuan spent.

Reflecting China's wobbly economy, data due later this month is expected to show annual investment growth slid to a near 13-year low of 16.2 per cent in January-September.

Whether the slowdown was for the better part driven by China's cooling economy or engineered by authorities' efforts to wean the nation off heavy investment is unclear. But what is certain is that energy firms and machinery makers, the usual capex heavyweights, have led the latest savings drive alongside telecom firms and food, beverage and tobacco companies.