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China’s second quarter GDP growth slowed to a year over year rate of 7.6 percent, which was less than some observers had expected, and less than the first quarter’s 8.1 percent growth. The surprise, such as it even was, was confined to outsiders, however, as Beijing’s policy makers already had announced a benchmark interest rate cut ten days ago. China’s GDP has now slowed for the last year-and-a-half, with the 7.6 quarterly growth the slowest in the last three years. While earlier in the year Premier Wen Jiabao had said that growth for the full year 2012 would be at 7.5 percent, most observers felt that he was setting the bar low and that China’s economy would easily top that figure. Subsequent further slowing in Europe which has dramatically affected the global picture, particularly for industrial and manufacturing demand, has made that figure a more challenging one.

Additional Numbers

Most of the data released with or prior to the GDP report confirmed the depth of the slowdown. There was a clear easing in consumer prices, while input prices for producers fell sharply, and even import growth was weaker than expected. The trend on these fronts has been consistent, but some patches of the economy were stronger than others on a relative basis. The power industry, for example, produced no real growth domestically as its results were essentially flat. Industrial production rose 9.6 percent, which was less than an expected 9.8 percent increase. The Chinese consumer did his and her part, adding to the 13.7 percent growth in retail sales, which was slightly under the gains achieved in May. And real estate investment, showing Beijing’s successful attempts at curbing the excesses in the property markets, grew by roughly 16 percent instead of the nearly 33 percent it was growing a year ago, while actual property sales grew 6.9 percent by revenue in June, a healthy sign.

What To Expect

Policy easing measures have already been ramped up, but expect these to be accelerated even more. While the property market curbs will continue, there may be more done on the interest rate front. If not there, the loosening of the borrowing constraints which should see more capital available at lower interest rates getting into the hands of the borrowers who need it most is one of Beijing’s goals. While critics have suggested that Beijing is moving too slowly, critics have been calling for more massive action, much like moves in the wake of the 2008 financial crisis. That, however, was vastly different. There was massive unemployment, with almost 20 million jobs lost, and global trade didn’t merely stagnate, it seemed to halt almost overnight. Many analysts have already suggested, to the contrary, that the gradual moves the government has been making are already making a difference, blunting the slowdown.

More Moves

With this quarter’s GDP number, growth has slowed for the half year to 7.8 percent. Government statistics point out that this growth has been comprised of 4.5 percent by consumption on the domestic side, while exports subtracted 0.6 percent. The rest of the growth was provided by capital spending, which is another area of policy concentration for Beijing. It has attempted to ramp up infrastructure and construction project spending. The breakdown of these figures shows that while more is yet to be done, the encouragement of internal demand and domestic consumption is having some positive effect while the export trade slows.

Prognosis Positive

The real meaning of the latest GDP numbers is that China is working to ramp up growth, especially in the areas where it needs it, and will obviously continue to stay vigilant. John Rutledge and Stephen Roach, two China experts, maintain that despite China’s problems, it has a solid handle on dealing with the slowing growth and that positive momentum should be restored in the economy. The interest rate cuts that came ahead of the GDP figures being released seems a signal that was missed by many that Beijing is more on top of the situation than it’s been given credit for. Again, this is not 2008. Drastic measures aren’t need nor will they likely be. Whether China has reached the bottom in this economic cycle or not yet, it’s interesting to note that some observers are still projecting an 8 percent GDP growth for the full year.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst