China softlands a little too softly

In any other part of the world, a quarterly GDP growth rate of 10.3% year-on-year would be considered a scorcher, a symptom of an economy on overboil. But in China, some analysts worry that the data out on Thursday is a sign that the government has perhaps “overtightened” and may need to ease up and stimulate the economy.

China’s GDP eased to a marginally lower orbit of growth in the second quarter, registering 10.3% y-o-y against 11.9% y-o-y in the first quarter. Overall growth rate in the first half was still a healthy 11.1% y-o-y, but some see a “bumpy ride” in the second half.

“The pace of growth is still historically high, but if this trend of slowing growth continues into the second half, the Chinese economy may possibly swoon through the summer,” reckons Societe Generale’s chief Asia economist Glenn Maguire. “Stimulatory policy will be reactivated to avoid such an outcome.”

China, he adds, “has a historical disposition to overtighten”, and the measures to cool the property sector, which became strident in April-May, “appear to have caused some collateral damage to genuine construction activity.” The efforts to drain liquidity through hikes in banks’ reserve requirement ration (RRR) and stricter quota management on bank lending “all appear to have extracted a greater than expected toll on the Chinese economy.”

Industrial production slowed down to 13.7%, down sharper than expected from 16.5% in May. “Tighter policy measures to cool bank lending is dampening investment and industrial production,” points out Moody’s Economy.com analyst Matthew Circosta. The latest data, in fact, suggests that industrial production could be growing at a “below-trend annual pace”, weaker than the 15% average annual growth recorded over the last 19 years.

HSBC’s co-head of Asia economic research Qu Hongbin acknowledges that “the faster-than expected” deceleration in industrial production growth may “refuel concerns about China’s had landing”, but in his estimation, “such worries are overplayed. This is just a slowdown towards more sustainable growth, not a meltdown.”

Although the growth moderation was expected, “a greater worry for the government is that a moderate slowdown in growth in April and May has segued into a more rapid deceleration in the final month of the quarter,” points out Stone & McCarthy Research Associates analyst Tom Orlik.

“Today’s numbers will strengthen the hand of the pro-growth lobby and test the resolve of the government on pricking the real estate bubble, and the withdrawal of the monetary stimulus.”

If growth slows down significantly further, “we are likely to see some adjustment in policies to support domestic demand,” says Barclays Capital analyst Wensheng Peng.

In fact, he reckons, there are already some signs that the government is relaxing the strict controls over approval of new projects that were implemented in the first half.

But not everyone believes that the data is all grim. “China’s economy is slowing, but not falling apart,” says Standard Chartered economist Stephen Green.

And although he feels that the slowdown is “a little more aggressive than the market expected,” he believes that Beijing appears to have achieved all of its aims for the moment: “to take the heat out of overstimulated parts of the economy, ring-fence local government debt and get back to a more sustainable growth.”

Credit Suisse economist Dong Tao too points out that “growth momentum has stepped down one notch, but we do not think the economy will collapse, as consumption remains solid, and the moderation is what Beijing has aimed for.”

Also on the plus side, consumer price inflation moderated in June to 2.6% y-o-y, against a stronger-than-expected 3.1% y-o-y in
May.

“This is a welcome development and could allow the government to delay further tightening measures,” notes Moody’s Economy.com economist Alaistair Chan.