China's Economic Growth Quickens to 7.9% on Record Loan Volume, Investment

July 16 China’s gross domestic product grew 7.9 percent in the second quarter as the nation became the first of the major economies to rebound from the global recession.
The figure, announced by the statistics bureau in Beijing today, exceeded the 7.8 percent median forecast of 20 economists in a survey and a 6.1 percent gain in the first quarter that was the slowest in almost a decade.
China, the biggest contributor to global growth, overtook Japan as the world’s second-largest stock market by value yesterday after a 4 trillion yuan ($585 billion) stimulus package spurred record lending and boosted share prices. The first-half expansion laid the foundation for meeting the year’s 8 percent growth target for creating jobs and maintaining social stability, the statistics bureau said today.
“The pace of the recovery is even quicker and stronger than we initially expected,” said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, who raised his growth forecast after today’s report. “There’s clear evidence that this infrastructure-led recovery is going to be more sustainable than many people expected.”
The yuan traded at 6.8312 against the dollar as of 5:30 p.m. in Shanghai, from 6.8315 before the data were released. The Shanghai Composite Index closed 0.2 percent lower.
‘Not Yet Firm’
The foundation of China’s recovery is “not yet firm” and the government will stick to its “moderately loose” monetary policy and “proactive” fiscal stance, statistics bureau spokesman Li Xiaochao said.
China accounted for a third of global expansion last year, according to International Monetary Fund data using purchasing- power-parity calculations to account for exchange-rate differences.
The global economy will shrink 1.4 percent this year, including a 2.6 percent contraction in the U.S. and a 6 percent decline in Japan, the IMF said in a July 8 report. Emerging economies, led by China, are set to regain growth momentum in the remainder of this year, helping the world to recover from the worst slump since World War II, the IMF said.
“China’s growth is getting back on track after being pulled down by the global export slump,” said David Cohen, an economist with Action Economics in Singapore. “It’s leading the turnaround in the global economy.”
Urban Spending
Urban fixed-asset investment surged 35.3 percent in June from a year earlier, the statistics bureau said. The 33.6 percent gain for the first half was the biggest in five years. Industrial production increased 10.7 percent in June from a year earlier, the largest gain in nine months excluding seasonal distortions. Retail sales climbed 15 percent.
An infrastructure spending boom is helping companies from China Southern Power Grid Co. to China Merchants Property Development Co.
“China still faces difficulties including shrinking external demand, falling corporate profits and declining fiscal revenue,” Li said. “We’re still facing great pressure in generating jobs.”
China’s economy is the only one of the world’s 10 biggest still expanding. The People’s Bank of China sold today one-year and three-month bills at the highest yields this year, guiding money-market rates higher to slow record growth in money supply.
$2 Trillion Reserves
The nation’s foreign-exchange reserves, the world’s biggest, rose to a record $2.132 trillion last quarter as the central bank sold yuan to prevent an appreciation that would make the country’s exports more expensive.
Tim Condon, chief Asia economist at ING Groep NV, said the central bank may raise the one-year lending rate as early as the first quarter of next year.
“Growth may accelerate to near 9 percent in the third quarter and 10 percent in the fourth quarter,” said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. “The government won’t tighten policies too early but it should tell banks not to lend without limit.”
The government must prevent abnormal growth in loans as they could trigger inflation and financial risks, the financial and economic affairs committee of the National People’s Congress said, the official Xinhua news agency reported.
Morgan Stanley, JPMorgan Chase & Co., Royal Bank of Scotland and UBS AG raised growth forecasts for China today. The economy will expand 9 percent in 2009 and 10 percent in 2010, Morgan Stanley said in an e-mailed note.
Social Stability
China is targeting faster growth to maintain stability after the loss of millions of migrant workers’ jobs and ahead of the 60th anniversary of Communist Party rule in October. Ethnic riots in Urumqi in the northwestern Xinjiang province on July 5 left at least 192 people dead.
The GDP rebound snaps a two-year run of progressively slower growth. Shanghai’s benchmark stock index has climbed almost 90 percent from last year’s low, led by PetroChina Co. and Industrial & Commercial Bank of China Ltd.
The economy grew 7.1 percent in the first half from a year earlier. Consumption contributed 3.8 percentage points and investment accounted for 6.2 percentage points, with a decline in the trade surplus shaving off 2.9 percentage points.
Consumer prices fell 1.7 percent in June from a year earlier, the fifth monthly decline and the biggest drop since 1999, today’s data showed. Producer prices slid a record 7.8 percent.