China growth picks up as stimulus kicks in, more support may be needed
BEIJING (Reuters) - China's economic growth picked up slightly in the second quarter as a burst of government stimulus paid dividends, but analysts said Beijing will likely need to offer more support to meet its annual growth target as the property market slows.
Analysts remain cautious about the economic outlook, noting that the pick-up in growth was driven more by government support than a natural recovery in momentum, as evidenced by a surprising surge in lending by state-controlled banks in June.
Many believe the slowing property sector poses the biggest risk to the economy in the second half of the year, and thus could dictate whether Beijing sticks to a steady rollout of modest stimulus steps or considers more aggressive action such as interest rate cuts.
"The recovery is quite dependent on government support. So I think the government can choose either to tolerate lower growth or to do more stimulus to achieve their growth target," said Chang Jian, an analyst at Barclays Capital in Hong Kong.
"The biggest risk (to the economy) for the second half is a property correction and related financial risks," she said.
The economy grew 7.5 percent in April-June from a year earlier, the statistics bureau said on Wednesday, just ahead of a median forecast of 7.4 percent in a Reuters poll.
A raft of support measures helped lift the pace from an 18-month low of 7.4 percent in the first quarter, with infrastructure investment and related manufacturing offsetting the drag from weak exports and the cooling property market.
Stimulus measures have included sharply higher bank lending,
reducing the amount of cash some banks have to hold as reserves, instructing regional governments to quicken their spending and hastening the construction of railways and public housing.
Though officials continue to describe such steps as "fine-tuning", Beijing has been steadily broadening the scope and depth of its assistance, as indicated by the June lending surge and reported moves by local governments to ease home buying restrictions.
The property sector continues to drag on growth, even though Reuters calculations showed home sales by value picked up sharply in June as state-controlled banks made credit more easily available.
A senior central bank official was quoted as saying this week that Chinese banks increased their lending to the property sector by 18 percent in the first six months of 2014 compared with the year-ago period, in what he said is a "forceful" show of support.
In spite of such moves, however, growth in China's real estate investment slowed in the first half of 2014 while sales and new construction slipped.
Real estate investment, which affects more than 40 other sectors, rose 14.1 percent in the first half of 2014 from the same period a year ago, down from an annual rise of 14.7 percent in the first five months, official data showed on Wednesday.
Peng Wensheng, chief economist at CICC, estimated that the slowdown in property investment could cut China's 2014 economic growth by about 1 percentage point, based on his estimates that the property sector makes up for 20 percent of GDP.
Property investment growth could slow to 14 percent this year from nearly 20 percent in 2013, Peng said in a note.
New property construction fell 16.4 percent in the first six months from a year earlier, while property sales in terms of floor space dropped 6 percent, threatening not only a loss of jobs but lower sales of home and building materials from cement to copper pipes and furniture.
"China will remain at a tipping point between a growth recovery driven by government stimulus on one hand and a major drag on the economy coming from real estate," Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said in a note ahead of the GDP data release.
"The jury will remain out regarding which factor will end up winning."
Top leaders have ruled out any massive stimulus as China struggles to deal with piles of local government debt, the hangover from a 4 trillion yuan ($644 billion) spending package implemented in 2008-09 to help cushion the country from the global financial crisis.
SERIOUS ABOUT TARGET
The unexpectedly hefty increase in bank loans in June had been taken as a signal of Beijing's alarm at the slowdown, and how far it is prepared to go to get growth back on track.
Premier Li Keqiang vowed recently that the economy would grow by at least 7.5 percent in 2014, surprising many market watchers after a weak start to the year and reinforcing expectations of more government assistance to come.
"We believe Beijing is quite serious about its 7.5 percent growth target as it needs a stable economic and financial backdrop as it steps up its anti-corruption campaign," said Ting Lu, China economist at Bank of America-Marrill Lynch in Hong Kong.
"So we think the new government will most likely continue its mini-stimulus," he said in a note.
Lu expected the government to stick with modest policy steps, refraining from bolder steps such as cutting interest rates or reserve requirement for all banks, while Barclays' Chang expected the central bank to cut rates in the third and fourth quarters.
($1 = 6.2072 yuan)
(Editing by Kim Coghill)
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