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GROWTH in China's Gross Domestic Product (GDP) in the second quarter indicate that the economy is stabilising, as Beijing's support measures kick in.
Analysts warn, however, that challenges remain.
In the three months to June, the Chinese economy expanded 7 per cent, above analysts' predictions and about the same as in the first quarter.
Bloomberg had estimated Q2 growth to be 6.8 per cent, as the economy grappled with slowing trade, overcapacity throughout the industrial sector, a lack of confidence in the property sector and ballooning corporate and local government debt.
But quarterly and monthly data published yesterday by the National Bureau of Statistics showed tentative signs of the economy bottoming out on the back of Beijing having repeatedly cut interest and reserve requirement ratio (RRR) rates, boosted investments in housing and railways and, more recently, implemented an arsenal of measures to support a volatile but surging stock market.
June industrial production growth improved to 6.8 per cent from 6.1 per cent. Fixed-asset investment was unchanged at 11.4 per cent last month, while retail sales picked up to 10.6 per cent, up from 10.1 per cent in May. On a quarterly basis, the economy grew 1.7 per cent, from 1.4 per cent in the previous quarter.
This supports the stronger trade monthly data reported earlier this week, with exports back in positive territory.
The data shows that the services sector led part of the growth in the second quarter. Though a more detailed breakdown by sector will be published this month, economists estimate that China's surging stock markets, up some 150 per cent over the past 12 months, have added up to 0.4 percentage points to the economy.
The data also points to stronger state-led activity such as infrastructure and urban-rebuild activities, as China's state-owned firms benefit from easing credit conditions. In June, infrastructure investment growth increased to 19.2 per cent from 18.6 per cent.
Julian Evans-Pritchard with Capital Economics said: "Q2's stronger-than-consensus GDP growth partly reflects an unsustainable surge in financial sector activity that will prove short-lived. Even so, there are plenty of positive signs on broader economic momentum too."
Kamel Mellahi, Professor of Strategic Management at Warwick Business School, said: "The figures show that the Chinese economy is robust enough in the face of mounting headwinds. There are green shoots everywhere ... and more importantly, there are no indications of a spike in unemployment, which is reassuring for the government."
That said, economists remain cautious, going forward. The higher-than-consensus growth questions the reliability of the data, known to be regularly biased.
Despite the pickup in activity for June, they say fundamentals remain weak; China still has to persevere with its reform agenda, including restructure its state-owned enterprises, a move which would channel more credit into the private sector.
Dong Tao, China economist with Credit Suisse, said: "Observations on the ground suggest that private investment is still missing, while local-government-driven infrastructure construction is also on the weak side."
Figures show that property developers are still sitting on large inventories of unsold properties as growth in cement output has remained weak.
Industrial production averaged 6.3 per cent year-on-year growth in the second quarter, down from 6.4 per cent in the first three months of the year.
Other risks include possible downside pressure on the stock markets, which crashed last week, prompting unprecedented measures from the government.
Stuart Allsopp, head of Financial Market Strategy in BMI Research, said: "The key risk facing the Chinese economy stems from the potential for stock market weakness to undermine investment plans. It could also be argued that the failure of the economy to respond positively to a 150 per cent rally in the stock market over the past year reflects the weak fundamental state of the economy, which could once again be exposed by the recent market declines."
In the next six months, analysts expect more action by the central bank in the form of further interest and RRR cuts; Credit Suisse expects one more rate cut and 2 RRR cuts in the second half.
The National Bureau of Statistics said yesterday: "We must be aware that the domestic and external economic conditions are still complicated, the global economic recovery is slow and tortuous, and the foundation for the stabilisation of China's economy needs to be further consolidated."
Correction: An earlier version of this article stated that Stuart Allsopp, head of Financial Market Strategy in BMI Research, said: "The key risk facing the Chinese economy stems from the potential for stock market weakness to undermine investment plans. It could also be argued that the failure of the economy to respond positively to a 150 per cent rally in the stock market over the past year reflects the weak fundamental state of the economy, which could once again be exposed by more policy support."It should be "...exposed by the recent market declines." The article above has been revised to reflect this.