China must be radically reassessed by investors and could be lurching towards a more dramatic economic slowdown than Beijing authorities will admit, a CLSA report says.

The grim assessment from Eric Fishwick, chief economist at CLSA, an Asia specialist brokerage firm, argues that it will be impossible for China to achieve anything like the growth rates it is presently projecting for next year.

Even with aggressive government measures, growth in 2009 could plunge to 5.5 per cent, he said.

The super-bearish forecast depends on certain weak signals that may emerge in the fourth quarter of 2008, but comes amid reports from the Chinese electricity sector that suggest the country’s mighty manufacturing engine-room is already sputtering badly.

More than 70 per cent of the electricity generated in China is consumed by industry and according to reports, monthly national power output in October fell for the first time in a decade.

Traders in Singapore said it could be a slump that would have a huge negative impact on global commodity demand: ferrous and nonferrous metal-processing industries are among the heaviest consumers of electricity in China and it is their slowdown that is reflected in the drop in power usage.

In the report circulated to investors yesterday, Mr Fishwick dismissed the idea that the authorities in Beijing would be able to manipulate the economy as effectively as other analysts believe.

CLSA has cut its 2009 GDP forecast for China from the previously projected level of 8 per cent, citing in-house research that suggests China is suffering the sort of domestic slowdown that many investors dread.

In the report, Mr Fishwick acknowledges that the 5.5 per cent growth forecast theory will be resisted: the market has come to believe that Beijing will simply “not allow” growth to slow below 7 per cent.

But he argues that while Beijing has greater influence over China’s economy than most other Asian governments have over theirs, the breakneck expansion of the private sector - now two thirds of the economy - means that large parts of China’s growth machinery are beyond Beijing’s direct control and subject to the same rules and laws as other market economies. “Investors need to analyse China as ‘Just Another Capitalist Country’ and question whether government policy will actually work,” he said.

“China is revealed as extremely cyclical with the volatile expenditure components much larger compared with the stable ones. Our 5.5 per cent GDP forecast has already factored in a broad and aggressive government stimulus.”

Capitalist economies, he added, are hard to control and respond slowly and unpredictably to government policies.

Although China does have more mechanisms to influence economic activity than elsewhere in Asia, because GDP composition is biased towards exports and investment, external conditions will hold sway.

Also limiting Beijing’s influence on economic growth is the relatively low contribution to GDP of consumer spending and government investment - 37 per cent and 2.3 per cent respectively.

In that light, said the CLSA report, both measures to boost spending and any proposed fiscal policy gambits will be of limited overall effect.

Even when China ramped up spending in 1998 in response to the Asian Crisis, it did not manage to maintain growth levels above 8 per cent.

Not all analysts share CLSA’s bleak assessment. Goldman Sachs issued a report on the Chinese economy yesterday that told investors to expect it to stabilise in the second half of 2009, with a potentially strong positive effect on stocks.

Deng Tishun, Goldman’s China strategist, said that the index of Chinese stocks listed in Hong Kong could rise more than 50 per cent next year.

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