Clifford Coonan

China’s economy surprised on the upside in the second quarter, expanding 7 per cent year-on-year, ahead of forecasts, although the stock market crash at the end of the quarter may yet lead to further stimulus.

After years of double-digit percentage GDP growth, the world’s second biggest economy is witnessing a slowdown which the government says is part of the process of establishing growth on a sustainable footing. The government’s forecast is for growth of 7 per cent for 2015, the weakest rate in 25 years.

There was also upbeat monthly activity data released at the same time as the GDP figures, which struck a positive note, with industrial production hitting a five-month high, following reports of increased bank lending on Tuesday.

Despite the upbeat data, the stock market recovery that began in China last week after a slew of government steps to halt a crash ran abruptly out of steam, with markets dropping sharply in afternoon trade.

The CSI300 index fell 4.5 per cent to 3,926.54 points, set for its biggest daily fall since July 8, when it closed down nearly 7 per cent, while the Shanghai Composite Index lost 4.1 per cent to 3,764.18 points.

The worsening sentiment caused index futures to go negative across the board. CSI300 stock index futures for July fell 5.1 per cent, to 3,796.8, 129.74 points below the underlying index, while the small cap CSI500 index saw many contracts near their maximum 10 per cent daily downside limit.

“Sentiment is still weak,” said Du Changchun, analyst at Northeast Securities in Shanghai, noting that he believed most investors were selling to cash in on a brief, if sharp, rally that pushed up indexes over 10 per cent last week.

On the broader economic data, National Bureau of Statistics spokesman Sheng Laiyun told a news conference that policies introduced by the Beijing government to stabilise growth, boost reforms and restructuring, improve livelihoods and prevent risks had played significant roles for the economy.

“We think economic growth in the latter half of the year will most likely outperform that in the first half,” Sheng said.

The NBS rejected suggestions that figures were being inflated and said growth had been hard-won.

“We must also take note that domestic and the external economic environment remains complex, and the global economic recovery is tortuous and slow.”

Second-quarter GDP grew 1.7 per cent over the previous quarter, NBS data showed, while more than seven million new jobs were created in urban areas in the first half, with a target of 10 million for the year. Inflation rose 1.3 per cent during the period.

“Today’s data suggests that the economic recovery continues, but the upside surprise to the headline data may reflect more the outsized influenced of tertiary sector, particularly of the finance industry,” HSBC said in a research note.

“The underlying economy appears to be on a more modest pace of growth, and it remains both early stage and rather fragile. In order to strengthen and sustain the recovery, more policy easing measures are likely still needed,” the bank said.

HSBC is forecasting another 25 basis point policy rate cut in the second half, and full-year GDP growth of 7.1 per cent for 2015.

Julian Evans-Pritchard, China economist at Capital Economics, said the data partly reflected an unsustainable surge in financial sector activity that will prove short-lived, but said there were plenty of positive signs on broader momentum.

Mr Evans-Pritchard is keeping his forecast for 7.0 per cent growth unchanged.

“We think that the recent improvement in momentum and step-up in policy support will limit the downside risks to growth for the rest of the year,” he said.

The statistics bureau said recovery was driven primarily by an increase in domestic consumption, which produced 60 per cent of China’s economic growth in the first half, compared with 35.7 per cent for capital formation and 4.3 per cent from net exports.

There are lingering fears over the impact of the stock market crash of recent weeks, especially as companies and individuals borrowed heavily to buy shares in the first half.

(Additional reporting by Reuters)