Good news this morning in China’s report of second quarter GDP growth. Although by no means definitive good news. That is still a quarter or two away.
China’s economy grew by 10.3% in the second quarter. That was down from a clearly unsustainable 11.9% in the first quarter of 2010. Industrial production rose by 13.7% but that was less than the 15.1% increase in the first quarter. Urban fixed investment—real estate—grew by 25.5% in the first half of 2010 from the first half of 2009. That’s down from the 33.6% increase in the first half of 2009. Inflation fell to an annual rate of 2.9% in June from 3.1% in May.
All this points to a slowdown in China’s economic growth—exactly what the Chinese government, worried about rising inflation and growth in speculative bubbles in real estate and other assets, had  had hoped to achieve by reining in bank lending. (Exactly how much bank lending has actually declined is a matter of some dispute. See my post Does China have a bigger bank lending problem than the official numbers show? Stock markets won’t like that .)
Does this mean that we can stop worrying that these measures will overshoot and China’s growth will tumble to 7% or lower in by the end of 2010? By no means. The current figures are headed in the right direction but it’s impossible to judge from one quarter’s data how much momentum the slowdown has built up. To reach any kind of conclusion on that, investors will need more data—and that means more time.
All the numbers reported today were lower than economists had forecast. The consensus, according to Bloomberg, was for GDP growth of 10.5%, growth in industrial production of 15.1%, and inflation of 3.3%. In May consumer inflation had climbed to an annual 3.1% rate, the highest rate in 19 months.
At the least the second quarter data argues that the Chinese government won’t impose new controls on lending or the real estate market. I’d suspect that the government won’t rush to remove current restrictions either, preferring to wait for at least another quarter of data. That would put policy changes into the fourth quarter of the year. I think that the odds in favor of timing like that are also increased by uncertainty over growth rates for the European Union and U.S. economies in the second half of 2010.
Stocks sold off on the Shanghai market on the report, closing 1.9% lower for the day. That brings the total loss for 2010 to 26%. It’s always hard to figure out what the Shanghai market is reacting too since on many days the market trades on little but rumors about changes in government policy. But I’d guess that today’s drop is reaction to a conclusion that the drop in GDP growth isn’t big enough to lead Beijing to change its lending and real estate rules.
Disappointing to Shanghai, perhaps, but pretty much what I was hoping for from this quarter’s numbers.
Hey South,
google.com
Thought this might help. 🙂
Groovy, thanks very much for the lesson.
rich_126:
I posted yesterday that how frequent Jim writes about China, but I don’t feel too much or “obsessive”. Because Jim believes the real potential for investors from now on is in the emerging market and China obviously is the biggest fish in that market. All the posts that Jim wrote about China are related to those events that Jim views as key for investors to determine the market. And he keeps us updated for that matter. So, I am OK with it.
Disclosure: I am waiting for Jim’s buy signal on emerging market.
southof8
a gap is caused when a stock price moves suddenly in one direction or the other. generally, techical analysts expect the price action to ultimately come back and “fill” the gap, i.e. when the craziness subsides, stocks tend to return to more orderly price fluctuations and moves.
i assume that the POT gap was a down gap caused by some panic selling that has now been closed as the price moves back up (but i didn’t go and check the POT chart to verify).
Hey Mister, what figure would make you happy? 10.3%? 10.3% it shall be!
Can someone please explain what “gap” means in the context of stock price movements? Sigli used it above- “closed the gap”- and I’ve seen it used elsewhere as a verb. What does it mean?
Thanks.
If you can believe the numbers from Beijing about the policies of Beijing.
I think you are spending way too much time on China, almost obsessively so.
Off topic… POT closed the gap and continues to move up on a down day.
As stated ‘…I think that the odds in favor of timing like that are also increased by uncertainty over growth rates for the European Union…’
IMO the EU crisis is more political than financial. Let us not forget that EU had some difficulties in delivering the Treaty of Lisbon with the two Irish referendum. All this blocked for some time the needed reforms in EU. It seems that now is the time to fully implement the Treaty and that will cause ‘normal’ power struggles between EU Countries Blocs. At the moment Germany is in the front runner. We will live very interesting time ahead of us.
More on Treaty of Lisbon: http://en.wikipedia.org/wiki/Treaty_of_Lisbon