China's growth slows--modestly--and Asian markets cheer

07/13/2011 11:45 am EST


Jim Jubak

Founder and Editor,

Overnight, Asian stock markets cheered slower (modestly) economic growth in China. In the second quarter GDP grew by 9.5% year-to-year, China’s national statistics bureau said on July 13. That’s down from 10.3% growth for all of 2010 and follows 9.7% year-to-year growth in the first quarter of 2011. Economists had projected that growth would drop to 9.3% in the quarter, according to Bloomberg.

On the news Asian stock markets rallied for the first time in three days. Hong Kong’s Hang Seng Composite Index finished up 1.2%; the Shanghai Composite Index was up 0.7%; and Korea’s Kospi Index was up 0.4%. European and U.S. stocks have followed Asia’s lead today.

Worry that China was headed for a hard landing had increased when June inflation climbed to 6.4% from 5.5% in May. If measures to slow the economy—such as the latest 0.25 percentage point interest rate increase from the People’s Bank of China—didn’t bite soon, concerns went, then the central bank might have to escalate its efforts. That escalation raised the possibility that the fight against inflation could result in steps that would send growth tumbling. In that context a modest slowing of economic growth is an encouraging sign.

And the markets also interpreted the slowdown as a sign that China’s cycle of interest rate increases is nearing an end. The consensus among investors is that the People’s Bank will raise interest rates once or at the most twice more this year. And end of the cycle of higher rates would remove a major fear that has been hanging over China’s stocks since the fall of 2010.

Of course, no cup of tea leaves provides a perfectly clear forecast of the future. Industrial production climbed by 15.1% in June. That was more than the expected 13.1% growth. Fixed asset investment, another indicator of the speed of economic growth, rose by 25.6% in the first half of 2011 from the same period in 2010. Retail sales increased by 17.7%, above the consensus estimate of 17%. None of those figures are signals that the economy has entered a period of slower growth.

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