China GDP surges 7.9% in Q2

China’s economy grew 7.9% in the second quarter of 2009, faster than anticipated and largely on the strength of domestic demand.

But the data, released on Thursday, left economists divided on whether it confirmed a V-shaped recovery in China driven by aggressive policy responses or a worrisome imbalance that could lead to a “double dip” in growth.

The GDP growth improvement — from 6.1% in the first quarter to 7.9% in the second — “confirms the significant impact that China’s economic stimulus program has had on domestic demand and indicates the country is on course to achieve its 8% growth target for the year,” says JP Morgan chairman of China equities Jing Ulrich.

HSBC economist Qu Hongbin too felt the data “confirmed our expectations of a V-shaped recovery starting in the second quarter.” HSBC raised its full-year GDP forecasts for 2009 from 7.8% to 8.1%.

“Aggressive policy, a recovery in confidence and a strong rebound in industrial production are, in our eyes, the three keys to this strong growth,” says Standard Chartered economist Stephen Green. The burst of growth was mainly driven by domestic demand, although, as JP Morgan economist Frank Gong notes, exports are gradually stabilising at the bottom. “Fixed investment rallied 35.9% in Q2, rivalling the peak rate in the past decade,” Gong said.

RBS economist Ben Simpfendorfer, however, worries that “while the pace of growth is accelerating, the quality (of growth) is deteriorating.” And although he too revised GDP projections for 2009 upwards from 7% to 8%, he said: “I believe the economy will behave weaker than the reported numbers imply.”

In his estimation, the data “does not fully capture the collapse in business investment… Export shipments are still 30% below their peak and factories are running well below capacity, resulting in intensifying domestic competition for everyone.”

“The risk,” says Simpfendorfer, “is that the government, in chasing an 8% growth target, is relying too heavily on public investment and private residential investment rather than pushing ahead with the type of late-1990s structural reforms that will put the economy back on a sustainable growth trajectory.” The risks of a “double-dip” are still real, he adds, especially if fiscal deficit spending is curbed next year.

Green too says that although he expects moderately faster headline GDP growth in Q3 and Q4, “there are downside risks: private corporate and external demands are likely to remain sluggish. The industrial restocking process will come to an end in Q3 and the number of new project starts will fade at some point.”

UBS economist Wang Tao too raised GDP projections for 2009 (from 7.5% to 8.2%), but pointed out that inflation expectation had risen and increasing concerns about asset market bubble and future non-performing loans had already led to the central bank stepping up its sterilisation operations and stricter enforcement of existing regulations on bank lending. “In the coming months, we expect these types of targeted adjustment in policies to continue as the government tries to avoid large volatilities in the economy.”