China's growth gives hope to the world

China's GDP grows at 7.9% annual rate in second quarter, near the full-year target and above analysts' expectations.

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BEIJING (Reuters) -- China looks set to hit its full-year growth target of 8% after a surprisingly strong second quarter notable for a surge in investment driven by powerful fiscal and monetary stimulus.

Annual gross domestic product growth accelerated in the second quarter to 7.9% from 6.1% in the first quarter, making China the best-performing major economy and reinforcing hopes that the world economy is pulling out of its deepest recession in 80 years.

Economists had forecast 7.5% growth, and several promptly responded to Thursday's figures by raising their projections for this year and next.

"We see clear upside risks to our current GDP growth forecast of 8.3% for 2009," said Yu Song and Helen Qiao at Goldman Sachs. They said the second quarter's 7.9% growth translated into a 16.5% pace compared with the first quarter when expressed as a seasonally adjusted annualized rate.

A string of accompanying data for June from the National Bureau of Statistics depicted an economy successfully making up for a slump in exports through domestic demand, especially capital spending, generated by a 4 trillion yuan ($585 billion) pump-priming package and record bank lending.

"It's very encouraging: the 8% growth target is in sight," said Daniel Soh, an economist at Forecast in Singapore.

"It's by now clear that the fiscal stimulus package has offset the contraction in export activity."

Tokyo shares hit a one-week high and shares elsewhere in Asia powered to their highest level in a month as the Chinese data buoyed hopes for a global recovery.

Investment surges: Factory output growth quickened to 10.7% in the year to date as of June, beating forecasts, from May's 8.9% reading, while investment in fixed assets in urban areas grew 33.6% in the first half, up from 32.9% in the first five months.

"Investment growth will accelerate in the third quarter and become even faster in the last quarter of this year," said Hao Daming, a senior economist at Galaxy Securities in Beijing.

"The recovery is confirmed. The bottom was the fourth quarter last year," he said.

Li Xiaochao, a spokesman for the statistics office, said the data had laid a foundation for hitting the 2009 growth target, the minimum deemed necessary to hold down unemployment.

"Our economy is continuing to turn for the better, and there are more and more positive factors," Li told a news conference.

"We see more people shopping and prices beginning to rise. The economy is recovering and the recovery is intensifying. All the government's policies have worked together to help us overcome the financial crisis," he said.

Li singled out strength in China's car and property markets.

Retail sales, a proxy for consumption, rose 15% in June from a year earlier after May's 15.2% increase.

But, in a signal that the government is not ready to wind back its pump-priming, Li said the recovery was not yet on a solid footing and the economy was growing below potential.

He said prices were still falling, overall demand was weak, some industries faced overcapacity; and the industry use rate was low.

"The recovery is not fully balanced, so there are some regions that have not done as well as others," Li said.

The lopsided nature of the economy was evident in a breakdown of the first-half GDP growth rate of 7.1%.

Investment accounted for a whopping 6.2 percentage points of overall growth, showing the emphasis on building roads, railways and other infrastructure in the government's stimulus package.

Consumption contributed a positive 3.8 percentage points to GDP, but net exports subtracted 2.9 points -- a reflection of the slump in demand for Chinese goods triggered by the global crisis.

Central bank vigilant: A few months ago, in the depths of the global recession, the strong growth reported on Thursday appeared fanciful to many.

Now, the central bank, nervous about the record pace of bank lending, has begun to tap gently on the monetary brakes, selling more of its paper to absorb excess cash in the banking system and nudging up money market rates.

Economists believe the political imperative of securing a copper-bottomed recovery is so great that the central bank will not run the risk of aggressively tightening policy any time soon.

Still, economists expect more "fine-tuning" of money market rates as well as sterner guidance to banks not to lend so much. Some are even talking about when interest rates might have to rise.

Tim Condon, head of Asia research at ING in Singapore, who raised his 2009 growth forecast to 8.3% from 7.5%, said he thought borrowing costs could now rise as soon as the first quarter of next year.

"The consensus is probably later than that," Condon said. "The consensus is that China can keep this very loose policy for a very long time." To top of page

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