China’s economy slows moderately

By Zhou Xin and Simon Rabinovitch

BEIJING (BestGrowthStock) – China’s economy (Read more about the fastest growing economy.) slowed in the second quarter as the government steered monetary and fiscal policy back to normal after a record credit surge last year to counter the global crisis.

Annual gross domestic product growth moderated to 10.3 percent from 11.9 percent in the first quarter, the National Bureau of Statistics (NBS) said on Thursday. The reading was slightly below market forecasts of 10.5 percent growth.

Other data suggested that curbs on lending to home buyers and local authorities, along with an ebbing of government stimulus spending and an end to inventory rebuilding, were biting with greater force as the quarter drew to a close.

Economists expect no dramatic policy response to Thursday’s data. The government has engineered the slowdown — markets feared overheating earlier this year — and Premier Wen Jiabao has said the economy is going in the expected direction.

“The GDP and other activity data are basically in line with expectations, and consistent with our view that China’s recovery is slowing from the fast pace set in the first quarter but remains relatively solid so far,” said Brian Jackson, strategist at Royal bank of Canada in Hong Kong.

Factory growth slowed to 13.7 percent in the year to June, below forecasts for 15.3 percent and May’s 16.5 percent growth.

“The good news is the economy is holding up. The bad news is investment is coming down, hence demand for commodities will fall,” said Dong Tao, chief non-Japan Asia economist for Credit Suisse in Hong Kong.

Offshore yuan forwards showed little reaction to the figures, which have circulated widely in China’s markets since Tuesday. The Shanghai stock market edged up 0.5 percent and stocks in Asia-Pacific outside Japan pared early losses and were broadly steady in a sign of relief that the data brought no major negative surprises.

GO SLOW, PAPER URGES

But the slower growth makes it increasingly likely that the pace of monetary tightening will slow, as Shanghai money markets have been speculating this week.

The government should refrain from any further policy tightening as the economy may slow more sharply than expected in the second half of the year, the official China Securities Journal said on Thursday.

“In the second half of the year, external demand will gradually weaken and the dividend from the trade surplus will fall. This requires an increase in overall social investment and a halt to tightening of both fiscal policy and monetary policy,” an editorial said.

Financial markets have been increasingly jittery that the government is applying the brakes too hard to an economy that has been a major engine of the global recovery from the deepest recession in 80 years.

China last year became the leading trade partner of Brazil, India and South Africa. German exports to China of machinery are booming.

Unlike many of its Asian peers, most recently Thailand on Wednesday, China has not raised interest rates this year.

But year-on-year growth in the stock of outstanding yuan loans slowed to 18.2 percent at the end of June from 33.8 percent as recently as November. Growth in the M2 measure of money supply moderated to 18.5 percent from 29.7 percent over the same period.

And half-year figures are expected to show that China, in contrast to deeply indebted Western governments, ran a fairly big budget surplus, according to market sources.

FALLING INFLATION

It is hard to judge the immediate impact of the tightening from year-on-year data and China does not issue seasonally adjusted month-on-month or quarter-on-quarter statistics.

But Thursday’s figures reinforce the view that the first quarter marked the cyclical peak for China, which is set to overtake Japan this year as the world’s second-largest economy after the United States.

Consumer price inflation fell to 2.9 percent in the year to June from 3.1 percent in May, below forecasts of a 3.3 percent rise. Consumption was resilient, even though annual retail sales growth eased to 18.3 percent in June from 18.7 percent in May.

Export growth has also remained robust, but the exit from last year’s super-loose monetary policy and tightening measures for the housing market are now having an impact on infrastructure and real-estate spending.

Year-to-date investment in fixed-assets such as flats and factories slowed, growing 25.5 percent against a year ago period after a 25.9 percent rise in May.

The swing factor, many economists say, is how abruptly private residential construction slows in response to the campaign against property speculation and whether the government can compensate for it by ramping spending on public housing.

A Reuters poll of economists released on Wednesday pointed to full-year growth of 10 percent in 2010, slowing to 9.0 percent in 2011.

(Writing by Alan Wheatley; Editing by Tomasz Janowski)

China’s economy (Read more about the fastest growing economy.) slows moderately