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By Jason Subler and Langi Chiang
BEIJING, Dec 15 (Reuters) - China's factory output growth slowed more sharply than anticipated in November, setting the weakest pace for a non-holiday month on record and raising expectations for more stimulus measures for the world's fourth-biggest economy.
Industrial output rose just 5.4 percent from a year earlier, well off the 8.2 percent pace in October and lower than economists' forecasts for a rise of 7.1 percent.
That was the worst reading since the start of 1999, the earliest date for which monthly data is available, excluding distortions caused by the timing of the Lunar New Year holiday, which falls in January some years but in February in others.
"Five percent GDP growth in the first half next year is now a reality, not a risk," said Ben Simpfendorfer, strategist with Royal Bank of Scotland in Hong Kong. "There's little doubt the data will look ugly over the next six months."
The abrupt slowdown in the country's factory activity reflected data last week that showed unexpected declines in both exports and imports, marking their biggest falls in years.
The economic deterioration will likely set off alarm bells in Beijing, where policy makers all the way up to President Hu Jintao have expressed concern over mounting job losses that could undermine social stability.
Aiming to maintain growth at the 8 percent pace officials consider necessary to create enough new jobs, the government last month unveiled a 4 trillion yuan ($586 billion) stimulus package.
The People's Bank of China (PBOC) has also cut benchmark lending rates by a total of 1.89 percentage points since mid-September. They stand at 5.58 percent.
But most economists expect the slowdown to accelerate, after annual growth in GDP weakened to 9 percent in the third quarter from 11.9 percent for all of last year.
A breakdown of the output data suggested cause for concern:
Output for export delivery fell 5.2 percent from a year earlier in November, production of motor vehicles fell 15.9 percent, while power output dropped 9.6 percent, the fastest pace on record, the National Bureau of Statistics said.
"I don't think there are any signs the drop will stop," said Qi Jinmei, senior economist at the State Information Centre in Beijing. "Next year will be a really harsh year."
The data weighed on shares. While the Shanghai Composite Index ended up 0.52 percent, it underperformed regional markets.
Tokyo's main index rose 5.2 percent and other Asian shares were up 3.1 percent at 0909 GMT.
FURTHER RATE CUTS
Jiming Ha with China International Capital Corp in Beijing said he was revising his fourth-quarter economic growth forecast downward to 5.0-5.5 percent from his original forecast of 6.3-7.5 percent. He expects the economy to expand by 7.3 percent in 2009.
"The problems of overcapacity and unemployment will become even more prominent due to the economic slowdown," Ha said in a research note. He expects another 108 basis points in interest rate cuts by the middle of 2009.
If there is any positive news for the economy in the November data so far, it is that banks extended 476.9 billion yuan ($70 billion) in new domestic-currency loans during the month, rebounding sharply from 181.9 billion yuan in October.
"This means that the PBOC's U-turn in its policy over the last two months seems to be starting to take effect," said Qu Hongbin, chief China economist with HSBC in Hong Kong.
"That ... is very important, because the concern is that if we see economic growth continue to decelerate and then banks become even more cautious on lending, then you start to have a negative feedback process."
Still, money supply growth continued to weaken. The broad M2 measure grew by 14.8 percent from a year earlier in November, the slowest in over three years.
That is well below the 17 percent pace the State Council, or cabinet, said over the weekend it was targeting for next year, as it pledged a host of financial innovations to make it easier for companies to obtain credit.
As the existing fiscal and monetary measures start to work their way through the economy, many economists expect to see signs of stabilisation in the second half of next year.
However, Lu Zhengwei, chief economist with Industrial Bank in Shanghai, cautioned against complacency, saying he expected the central bank to be compelled to cut interest rates by 54 basis points by the end of this month.
"China has to loosen its policies quickly enough to ensure that its economy recovers earlier than other countries in the next round of growth," Lu said. "Otherwise, it will be trapped in stagflation." (Additional reporting by Shen Yan, Eadie Chen and Shao Xiaoyi; Editing by Ken Wills)