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China's 2Q GDP grows better-than-expected 7%, brings cheer to markets

Assif Shameen
Assif Shameen • 3 min read
China's 2Q GDP grows better-than-expected 7%, brings cheer to markets
SINGAPORE (July 15): Investors in Asia are cheering China’s latest flash GDP growth estimates for the second quarter. The world’s second-largest economy grew 7% in the April-June quarter, the National Bureau of Statistics said in a statement this morn
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SINGAPORE (July 15): Investors in Asia are cheering China’s latest flash GDP growth estimates for the second quarter. The world’s second-largest economy grew 7% in the April-June quarter, the National Bureau of Statistics said in a statement this morning.

The numbers beat most economists' estimates of around 6.8% for the quarter. With 7% growth registered in the first quarter and a cyclical recovery under way, China is likely to meet or exceed the current calendar year’s 7% target, the slowest pace of growth since the global financial crisis. "The main indicators show signs of recovery and the trend is improving,” the NBS statement said.

Industrial production in China grew 6.8% in June year-on-year, above the 6% growth most economists had forecast and an improvement from May's 6.1%.

“Stronger-than-consensus (2Q) GDP growth partly reflects an unsustainable surge in financial sector activity that will prove short-lived,” Julian Evans-Pritchard, China economist for Capital Economics, warns in a note this morning. Still, he notes that “there are plenty of positive signs on broader economic momentum in today’s data.”

The Singapore-based economist believes that the “stronger-than-expected figure will inevitably spark renewed questions over the veracity of the official data”. While he notes that actual growth is almost certainly a percentage point or two slower than the official figures show, there are good reasons to think that the latest figures reflect a genuine stabilisation of conditions on the ground.

What’s driving the growth in China which was supposed to soften? “The surge in brokerage activity associated with the equity bubble feeds directly into the service sector component of GDP,” says Evans-Pritchard. “As long as spending on brokerage services didn’t come at the expense of growth elsewhere, headline GDP growth would have been stronger as a result."

There is also growing evidence of an improvement in the wider economy. "Although 2Q got off to a weak start, our growth rebounded sharply in May on the back of policy easing," he notes.

Capital Economics reckons that the support to growth from the financial sector should soon start to fade. Still, “the recent step-up in policy support will limit the downside risks,” it says. “With the drag from the structural slowdown in property and heavy industry now easing, we think that growth is on track to slow only gradually over the course of the next few years,” says the London-based consultancy.

Hong Kong’s Hang Seng Index and H-shares benchmark Hang Seng China Enterprise Index were both initially higher on the GDP data, but edged lower minutes later as selling continued in Shanghai and Shenzhen’s A-shares. Elsewhere in Asia, investors were more sanguine and cheered the latest signs that the Chinese economy had stabilised.

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