China’s Second Half Looks Up

China's Economy

China's Economy (Photo credit: GDS Infographics)

As expected, China reported on Friday that GDP growth in its second quarter slowed to 7.6 percent, just slightly above the government’s full year target of 7.5 percent. Second-quarter growth was the weakest it’s been since the 6.6 percent rate that was registered during the depths of the global financial crisis at the start of 2009. Combined with the 8.1 percent growth achieved in the first quarter, China’s GDP grew at 7.8 percent for the first half of the year.

As a result of Friday’s report, the hand-wringing about China’s economy continues, with one article after another speculating that China is headed for the hard landing that many were predicting at the start of the year. Moreover, doomsayers point to zero year-on-year growth in power generation in June as an indication that China’s economy is even weaker than the headline GDP numbers suggest.

There are two sides to every bet, though, and despite the prevalence of negative analyses, there are a number of respected economists who believe that China’s economy has seen the worst and that the second half will tell a different story. For example:

Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Markets, wrote in his periodic update on China’s economy, “In our view, the data shows that policy fine-tuning has gained traction and it will not be difficult for full-year GDP growth to reach at least 8 percent.”

Xianfang Ren, an economist at IHS Global Insight in Beijing said, “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.”

• Nomura’s Zhiwei Zhang believes that GDP growth bottomed in the second quarter and will rebound in the second half of the year. Zhang writes, “we believe the government is becoming less tolerant of an economic slowdown, as GDP growth is very close to its annual target of 7.5%, and we are approaching the important Communist Party meeting in October where the leadership transition is expected to take place.”

• Societe Generale’s Klaus Baader shares Zhang’s view and sees signs that the Chinese economy is bottoming out.

Why the optimism? There are a number of positive signs.

First, with China’s benchmark interest rate still at a relatively high 6 percent, despite two interest rate cuts this year, the People’s Bank of China has additional room to make further rate cuts to stimulate the economy.

Secondly, China’s economy is transitioning away from one that is overly dependent on government spending, so infrastructure spending has slowed. However government finances are strong and China has ample ability to increase spending, if needed. Fiscal revenues were 22 percent of GDP in 2011, up from 14 percent in 2000. China’s budget deficit was only 2 percent of GDP last year, and total government debt (including the debt of the country’s local governments) was only 38 percent of the country’s output.

Third, with the latest data showing that inflation, as measured by the consumer price index, has slowed to 2.2 percent, the government has plenty of leeway to apply both monetary and fiscal stimulus.

Fourth, it appears that monetary stimulus is already having an impact. The average home price in China’s 100 major cities edged up 0.05 percent in June from May, snapping a nine-month decline and reinforcing signs that property prices are stabilizing. The China Real Estate Index System (CREIS) data suggests that the property market has already benefitted from June’s twenty five basis point rate cut, as well as efforts by the local governments to stimulate housing.

Finally, consumer sentiment soared in June, according to MNI, a leading provider of news and intelligence for the global foreign exchange and fixed income markets.  The company’s latest China Consumer Sentiment Indicator pointedto a strong rebound in consumer confidence in June from the previous month. The survey, which is based on over 1000 interviews in 30 cities across China, indicated that confidence in China’s real estate and stock markets, as well as car-purchase decisions, strengthened in June as consumers reacted positively to China’s interest rate cut and the government’s economic stimulus measures. The index rose to 101.6 points in June from May’s 90.4, and was the highest in 22 months, according to MNI’s report. A score above 100 signals net optimism.

While warning that an economic rebound is not yet guaranteed and that risks lay ahead, Premier Wen Jiabao said over the weekend in Sichuan Province that the second half of the year would see the government “increase efforts to preset and fine-tune its policies, and make policies more targeted, foresighted and effective.” Wen went on to say that China’s economic fundamentals remain sound, and that the country has huge growth potential, citing a bumper summer harvest, easing inflation and rising incomes as evidence.

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