China's growth rate slowed for a sixth successive quarter to its slackest pace in more than three years, highlighting the need for more policy vigilance from Beijing even as signs emerge that action taken so far is beginning to stabilize the economy.
Year-on-year growth of 7.6 percent in the second quarter was a whisker above the government's official 7.5 percent full year target and dragged the first half average down to 7.8 percent. That's below the 8 percent level that in previous downturns has triggered a robust response from policymakers. The GDP number, released in a flurry of Chinese data on Friday, was roughly in line with investor expectations.
The trajectory of the economy is crucial for money managers facing a slowdown not only in China, the world's second-largest economy, but anemic growth across the BRIC grouping of major emerging economies – Brazil, Russia, India and China – which combine as the biggest marginal generators of global growth.
"I would say probably the worst is over and we are going to see some stabilization and even improvement in growth in the next quarter," Sun Junwei, China economist at HSBC in Beijing said, citing improvement in quarter-on-quarter growth and broad stability in June data for fixed asset investment, industrial production and retail sales. "It pretty much depends on what will be the strength of further easing, but I think the chance is good that (policymakers) are willing to respond to this growth slowdown."
Beijing's response to the slowdown so far, sticking rigidly to a mantra of fine-tuning and a series of tweaks to monetary and fiscal policy over the last eight months, has left the economy on track for its slowest full year of growth since 1999, raising the risk for some investors that the government is behind the policy curve. "At this moment, my focus is not how deep the fall was for the economy in the second quarter, but how long it's going to stay in a hole," Dong Tao, China economist at Credit Suisse in Hong Kong, said. "My view is that the Chinese economy will be in an L-shape (trajectory) for a while."
Two cuts to benchmark interest rates in the space of a month, the latest just last week, and liberalization moves that permit discounts to borrowing costs of up to 30 percent more, are signs to others that policymakers will do all they can to underwrite growth. China's central bank later on Friday urged lenders to channel more funding towards the real economy, particularly services industries, the environment and green energy sectors. The People's Bank of China also said banks should "actively respond" to interest rate liberalization moves.
Sheng Laiyun, spokesman at China's statistics bureau, said the data signaled that the economy was stabilizing in Q2 and that growth in the first half was in line with expectations. The Q2 forecast in the benchmark Reuters poll was 7.6 percent.
Financial markets took the data in their stride, with Hong Kong shares gaining slightly on relief that it wasn't any worse, a sentiment echoed among oil traders who nudged Brent crude oil down a touch, while the China-sensitive Australian dollar edged up from session lows.
SOFT LANDING, SERIOUS PAIN
"Overall, this is a soft landing, but we can see that the Chinese economy is undergoing serious pain," said Xianfang Ren, an economist at IHS Global Insight in Beijing. "I have 80 percent confidence that the economy will pick up in the third quarter as we have been in a slowdown for six consecutive quarters now. However, if the economy does not show an upturn in the next few months, factories will probably have to lay off workers and that will hit employment."
Jobs are a crucial variable for China's Communist Party leadership, especially in the run-up to its once-a-decade handover of power – a showpiece event scheduled for the autumn that the government is determined to ensure takes place against a backdrop of social stability and economic prosperity.