China's Q2 growth slows to 7.5 per cent

BIEJING - China put on a brave front as the economic juggernaut slumped to its lowest level in over a decade, dragged down by weaker than expected factory output and investments that raised risks of missing its official growth target.

The world's No. 2 economy grew at 7.5 per cent in the second quarter, down from 7.7 per cent in the first quarter and 7.9 per cent in the last quarter of last year.

But this was still a "stable performance", stressed statistics bureau spokesman Sheng Laiyun. The "moderate slowdown" was due in part to the new leadership's fine-tuning and reforms which allow for short-term pain, he told a press briefing on Monday.

Measures ranging from property market curbs to a clampdown on official entertainment spending to exiting from prior stimulus "will inevitably have some impact on growth in the short term", he explained. This can yield long-term benefits without undermining Beijing's priority of stable growth, he said.

"I believe meeting this year's growth target (of 7.5 per cent) is not a problem," he added.

Mr Sheng's reassurances, echoing recent comments by leaders like Finance Minister Lou Jiwei, signalled that while Beijing is prepared to tolerate slower growth of as low as 6.5 per cent, a hard landing is not in sight for now.

Global stocks rallied after investors who had feared a nasty surprise were relieved that the second- quarter figures were in line with forecasts. The Shanghai composite index rose 1 per cent.

Still, worries persist that China could be headed for a steeper decline in the coming quarters.

Growth might be "at risk of stalling", wrote IHS Global Insight analyst Xianfang Ren in a report.

China's five straight quarters of growth below 8 per cent were a "clear sign of distress". An alarming sign is that the slowdown is spreading more widely across the Chinese economy.

The second-quarter data indicated "quite a broad-based decline", said Moody's Analytics economist Alaistair Chan. This would suggest that the slowdown was not just the result of "the government... deliberately slowing the economy by targeting specific sectors like property".

"Aggregate demand is now quite slow," he cautioned.

Growth in last month's industrial output and fixed asset investments for the first half of this year fell, missing analysts' forecasts. Even retail sales, the bright spot in the economy which rose 13.3 per cent last month, could falter soon.

Cutbacks in investment could lead to lower incomes, curbing households' spending power, said Nomura economist Zhang Zhiwei. Meanwhile, China faces a financial crisis due to its huge debt problems, former government adviser Xia Bin warned in a commentary on Monday.

Risks include bankruptcy for some financial institutions and rising unemployment.

All this has led a slew of analysts to recently downgrade this year's gross domestic product (GDP) growth forecast to 7.4 per cent. This would be China's weakest pace since 1990.

Such a slowdown could also hurt its trading partners like Singapore whose exports to China may be hit.

In the event of a sharper than expected slowdown in China, "South Korea, Taiwan and Singapore stand out as the most vulnerable economies, given that exports to China account for between 12 per cent and 17 per cent of GDP", ABN Amro economist Roy Teo wrote in a recent report.

graceng@sph.com.sg

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