Posted by: Frederik Balfour on July 16, 2009
China’s GDP growth clocked an impressive 7.9% in the second quarter, surpassing economists expectations about the Chinese economic recovery. There is even now talk of a V-shaped recovery, which just a few months ago looked at best like a U-shaped rebound after 6.1% growth in the first quarter, the worst performance in a decade. No doubt the latest economic good news published by China’s National Statistics Bureau on July 15 will lead to yet another flurry of GDP upward revisions of China’s growth path.
HSBC China economist Qu Hongbin wasted no time in upgrading his figures: he reckons the Chinese economy will grow 8.1% this year and GDP expansion will accelerate to 9.5% in 2010. Previously he called for 7.8% and 8.1% in 2009 and 2010. His bullish upgrade for next year suggests the Chinese recovery will be far broader and deeper than most expected, evidence that growth will be sustained not just by the massive $586 billion fiscal stimulus package, but by strong growth in consumer demand.
Jing Ulrich, chairman and managing director of China Equities at JP Morgan (JPM) said in a note to clients today that “Despite the global economic downturn, China’s economic recovery will continue in the second half on the strength of the government’s fiscal stimulus and loose monetary policy. Recovering property investment and buoyant consumer spending suggest that these policies are proving effective at bolstering domestic demand at a time when exports remain structurally fragile.”
Officially, the Chinese government is still forecasting 8% growth for 2009, down from last year’s 10.6%, but still a remarkably strong performance given the plunge in exports, a key growth driver in the past. But there’s mounting evidence that China’s long cherished goal of on the back of local consumption. Take the auto market. At the beginning of the year the industry association was predicting a contraction in auto sales on the back of an anemic (for China) 6.7% growth last year. Instead, the China Association of Automobile Manufacturers on July 7 reported a whopping 17.7% increase in sales to 6.1 million vehicles, and is predicting this year’s sales could even top 12 million. For instance, General Motors sales through its joint ventures rose 38% in the first half to 814,442 vehicles.
The strength of the property sector has been another big surprise. Property sales were up 53% in the first six months from a year earlier, according to a survey commissioned by the statistics bureau and published in the China Information News, while nationwide prices averaged across 70 cities climbed year on year in June. This masks the fact that in second and third cities prices have been strengthening much more. Property normally accounts for about 25% of fixed asset investment in China and is a key form of wealth holding for most Chinese. Optimism about housing prices will translate into greater consumer confidence.
However China’s stimulus efforts still carry risks. New lending was up a whopping 201% during the first half of more than $1 trillion, equal to nearly one quarter of GDP, part of the reason why the Shanghai stock market is up nearly 75% this year. Easy money means some marginal investment projects that commence when interest rates are low may run into difficulties down the road when monetary policy tightens.