Risks remain for China growth

Picture: Reuters.

Picture: Reuters.

Published Jul 15, 2015


Shanghai - China’s economic growth proved resilient in the second quarter as policy makers stepped up support and a stock market boom -- since soured -- spurred services.

Gross domestic product rose 7 percent in the three months through June from a year earlier, the National Bureau of Statistics (NBS) said Wednesday, unchanged from the first quarter and beating economists’ estimates for 6.8 percent. Industrial output in June rose 6.8 percent, while fixed-asset investment increased 11.4 percent in the first half.

The result buoys prospects for Premier Li Keqiang’s 2015 growth target of about 7 percent and the outlook for the world economy, with China stabilising and the US forecast to accelerate. Much like last year, a sluggish start spurred more stimulus as the government orchestrated a debt swap for provinces and the central bank accelerated monetary easing.

“Downside risks are getting smaller,” said Ding Shuang, chief China economist at Standard Chartered in Hong Kong. “A modest recovery is expected in the second half.”

Services expanded 8.4 percent in the first half, the NBS said, while secondary industry including industrial production and mining grew 6.1 percent and agriculture 3.5 percent.

The data point to a “clear acceleration of momentum,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. The frenzied pace of stocks trading in the second quarter would have helped GDP, posing “downside risks in the third quarter as stock trading is bound to slow,” he said.

Shanghai Frenzy

China’s benchmark Shanghai Composite Index surged 150 percent in the year to a June 12 peak, before plunging in a correction that wiped out almost $4 trillion in value. The index fell 4 percent at 1:54 p.m. local time.

Retail sales increased 10.6 percent in June, the NBS data showed; economists had forecast 10.2 percent. One example of rising consumer power: nationwide box office revenue surged to 20.3 billion yuan ($3.3 billion) in the first half, the official Xinhua News Agency reported Wednesday. Back in 2008, when the global financial crisis hit the Chinese economy hard, the whole- year box office revenue was just 4 billion yuan.

By contrast, underscoring the downturn in China’s “old” growth drivers, crude-steel production shrank 1.3 percent in the first half compared with the same period of 2014.

Property investment in the first half slowed to 4.6 percent, while newly started developments by area plunged 15.8 percent, including a 17.3 percent fall in residential property.

Property Drag

The biggest brake on growth is “still the ongoing property adjustment,” Wang Tao, chief China economist at UBS Group AG in Hong Kong, said in an interview on Bloomberg Television.

“The PBOC will continue to have an easing bias,” she said. “They need to do more interest-rate cuts.”

Prospects for further reductions to banks’ required reserve rations will depend on capital flows, she said.

The GDP deflator -- the gap between nominal and real growth -- was negative 0.5 percent in the first half, highlighting room to ease monetary settings further.

The People’s Bank of China has cut interest rates four times since last November, with the latest to a record low announced June 27, to cushion the slowdown. It will “flexibly use various monetary policy tools” to keep appropriate liquidity and reasonable credit growth, the central bank said in a statement Tuesday after a quarterly committee meeting.

In other signs of stabilisation, China’s exports rose for the first time in four months in June, while consumer inflation accelerated. Still, if growth comes in at 7 percent this year, it would be the slowest expansion since 1990, when China was sanctioned by many countries after the Tiananmen crackdown.

Clouding the outlook is the stock market rout that triggered an all-guns-blazing policy response.

“The first impression from the latest data is one of stability, with signs of restored momentum heading into the second half,” Bloomberg’s chief Asia economist Tom Orlik wrote in a note. “However, to the extent that growth was supported by financial sector gains from the stock market, it won’t be sustained without further stimulus.”


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