WRAPUP 3-China economy slows, still in Beijing’s comfort zone

* China Q2 growth slows to 10.3 pct yr/yr from 11.9 pct in

* Inflation drops in June; Factory output weaker than

* Govt unruffled, says growth still high and as expected

* Chances of further tightening fade, but no loosening yet

* GDP growth touch below forecasts, muted market reaction

By Zhou Xin and Simon Rabinovitch

BEIJING, July 15 (BestGrowthStock) – China’s economy (Read more about the fastest growing economy.) cooled in the
second quarter, a slowdown that is likely to extend over the
rest of the year as Beijing steers monetary and fiscal policy
back to normal after a record credit surge 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.

Particularly striking was a sharper-than-expected drop in
factory growth to 13.7 percent in the year to June, below
forecasts for 15.3 percent and May’s 16.5 percent reading.

For stories on the Chinese economy, click [ID:nECONCN]

For a breakdown of Thursday’s data, click [ID:nBJL002048]

For reaction to Thursday’s data, click. [ID:nTOE66D08E]

For a poll on the 2010/2011 outlook, click [nSGE66D0AN]

Reuters Insider TV on China slowdown:



For graphics, click on:



But the government showed no sign of being perturbed,
partly because the slowdown reflected a high base of comparison
in 2009.

Sheng Laiyun, an NBS spokesman, said the GDP growth rate
remained high, in line with the average of the past decade and
well within Beijing’s comfort zone.

“The slowing will help our economy avoid overheating and
assist in the transformation of our economic model,” he said.

Economists polled by Reuters ahead of the data saw
full-year growth of 10 percent this year, slowing to 9.0
percent in 2011.


Most economists expect no dramatic policy response to
Thursday’s figures, which included a drop in consumer inflation
to 2.9 percent in the year to June from 3.1 percent in May.
Markets had forecast a 3.3 percent rise.

With growth slowing and inflation cresting, HSBC and
Barclays Capital said they no longer expected interest rates to
rise this year. Ting Lu said the chances of an increase in
required reserves was fading, too.

Beijing was likely to keep up its campaign against property
speculation while ramping up spending on public housing to
stabilise growth.

“Despite the slowing growth, we think the chance for
double-dip in China is quite small as China’s pragmatic
policymakers are quite flexible on policy stance. And they
still have a deep pocket to buffer any big slowdown,” Lu said.

One risk emphasised by Sheng, the NBS spokesman, stems from
the euro zone’s debt woes and its belt-tightening plans.
Chinese exporters have not suffered so far because they are
filling a backlog of orders, but pressure on them in coming
months could be quite significant, he said.

Market reaction was muted, perhaps because most of the
figures were leaked earlier in the week.

Asia-Pacific shares outside Japan (.MIAPJ0000PUS: ) were down
0.4 percent, back to their opening levels after a brief spike,
while the Shanghai stock market (.SSEC: ) shed 0.3 percent.
Offshore yuan forwards were little changed.


Consumption was resilient, although annual retail sales
growth eased to 18.3 percent in June from 18.7 percent in May.

But year-to-date investment in urban areas in fixed assets
such as flats and factories slowed a notch, growing 25.5
percent from a year earlier after a 25.9 percent rise in May.

And Dong Tao, chief non-Japan Asia economist for Credit
Suisse in Hong Kong, calculated that factory output, seasonally
adjusted, actually fell month-on-month in June for the first
time 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,” Tao said.

The moderation in growth, though engineered by the
government, makes it increasingly likely that the pace of
monetary tightening will slow. The official China Securities
Journal said on Thursday that the government should refrain
from further policy tightening as the economy may slow more
sharply than expected over the rest of 2010.

“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.

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

But year-on-year expansion 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.


Markets worry 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 top trade partner of Brazil,
India and South Africa. German exports to China are booming.

Thursday’s figures reinforced 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.

Goldman Sachs calculated that, at an annual rate adjusted
for seasonal variations, GDP growth fell to 8 percent in the
second quarter from 10 percent in the first. Morgan Stanley
estimated a more modest decline, to 8.4 percent from 9.2

“We expect growth will ease further in the second half of
the year, with external factors likely to determine the
severity of the slowdown,” said Brian Jackson, a strategist
with Royal Bank of Canada in Hong Kong.
(Writing by Alan Wheatley; Editing by Ken Wills and Tomasz

WRAPUP 3-China economy slows, still in Beijing’s comfort zone