Instant view: China Q2 GDP growth, June inflation slow

BEIJING (BestGrowthStock) – China’s economic growth slowed a bit more than expected in the second quarter in response to the fading of government fiscal and monetary stimulus as well as a high base of comparison a year earlier.

Curbs on lending to home buyers and local governments are also cooling the world’s third-largest economy. But Beijing has said the slowdown is unfolding as it expected, suggesting the government is in no hurry to make a major policy shift.

KEY POINTS:

— Q2 GDP growth 10.3 pct yr/yr (forecast 10.5 pct) after 11.9 pct in Q1

— June CPI +2.9 pct y/y vs forecast 3.3 percent.

COMMENTARY:

YU SONG AND HELEN QIAO, ECONOMISTS AT GOLDMAN SACHAS, IN A NOTE TO CLIENTS:

GDP — the implied qoq growth rate is around 8 percent SAAR, down from around 10.0 percent in 1Q2010.

Industrial output — Month-on-month growth fell to 2.1 percent mom SAAR in June from 3.5 percent in May

“While the yoy growth of GDP remains at a relatively high level of 10.3 percent, we believe its qoq growth of 8 percent annualized represents its underlying growth better.

“If anything, this 8 percent growth still overstates the latest activity growth momentum because, judging by the industrial production data which is reported at a higher frequency than GDP data, sequential mom activity growth since the start of 2Q has been even weaker (even considering the fact that GDP tends to be smoother than IP).

“We believe this slowdown in activity growth, as opposed to other non-economic factors, is the main reason behind the fall in mom CPI and PPI.

“We suspect the June CPI reading might be a touch lower than its true underlying level because of a potential statistical problem: food prices rebounded during the last week of June but the sampling of food prices, which is theoretically done several times a month, is often stopped before that, therefore, resulting in the probably downward bias in the June CPI reading.

“Nevertheless, there is no doubt that underlying inflationary pressures have been falling significantly since the start of the year.”

BRIAN JACKSON, STRATEGIST AT ROYAL BANK OF CANADA IN HONG KONG:

“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 Q1 but remains relatively solid so far.

“We expect growth will ease further in the second half of the year, with external factors likely to determine the severity of the slowdown.

“The main surprise in the data is the small dip in headline inflation in June. Inflation has been trending higher for about a year now, but this upward trend has been punctuated by short-lived reversals, and it is too soon to say whether the June number represents a turning point.

“Base effects should now start to put some downward pressure on headline measures of inflation, but there are also other factors — including easy liquidity and strong wage gains — that suggest we may still see inflation move higher in coming months.”

XING ZIQIANG, ECONOMIST AT CHINA INTERNATIONAL CAPITAL CORPORATION IN BEIJING:

“We can see most indicators are lower than market expectations, showing that economic growth is slowing down a bit from the first quarter.

“I don’t think we need to worry much about such a slowdown, because it is mainly caused by slower fixed-asset investment. The economy will keep growing at a fairly fast pace, and we maintain our forecast of annual GDP growth for the full year at 9.5 percent.

“I would rather say that the slower pace of GDP is a reflection of an improving economic structure, because the contribution of consumption to growth is increasing.

“Despite slower growth in the second half, I don’t think the government will introduce massive loosening measures or a second stimulus package.

“We think upward pressure on the CPI for the rest of this year will remain mild and we see it peaking around 3.4 percent in September.”

ZHANG LEI, AN ECONOMIST AT BOHAI SECURITIES IN TIANJIN:

“Most figures, including the broadest GDP data, are in line with market expectations except CPI and industrial output.

“Growth in CPI is lower than expected and the month-on-month fall of industrial output is bigger than we thought. This is the result of macroeconomic adjustment by the central government.

“The economy faces downward pressure in the second half and the growth rate is expected to continue to slow. However, we think the economy won’t see a double dip as the government is likely to increase spending in the end of Q3 or the beginning of Q4 in order to fuel growth.

“We don’t see the need to raise interest rates anymore because inflation is weaker than expected and the pace of economic growth is decelerating.”

DONG TAO, CHIEF ECONOMIST FOR NON-JAPAN ASIA AT CREDIT SUISSE IN HONG KONG:

“Growth is slowing down, but it is slowing down less than expected. Partially this is due to still robust consumption, but in the meantime I am still concerned about sharp moderation of industrial production.

“If we take it month-on-month, seasonally adjusted, this actually would be the first negative growth in industrial production since November 2008.

“The good news is the economy is holding up. The bad news is investment is coming down, hence demand for commodities will fall.

“The CPI is a good number.”

LINKS:

For details, see the website of the National Bureau of Statistics at http://www.nbs.gov.cn.

MARKET REACTION:

— The Shanghai stock market was up 0.06 percent at 0240 GMT. It had been flat before the data came out. One-year yuan NDFs were barely changed.

BACKGROUND:

— The economy is slowing as the government gradually normalizes fiscal and monetary policy after last year’s massive anti-crisis stimulus.

— Curbs on credit to local governments, real estate developers and home buyers have also taken the wind out of the economy’s sails.

— Still, government officials have repeatedly said of late that the economy is headed in the direction they expected and have quashed talk of an early relaxation of the property curbs.

— A Reuters poll released on Wednesday projected 10.0 percent GDP growth this year, slowing to 9.0 percent in 2011.

(Reporting by Aileen Wang, Farah Master and Michael Wei; Editing by Alan Wheatley)

Instant view: China Q2 GDP growth, June inflation slow