Has China Reached a Bottom?
07/13/2012 4:40 pm EST
The latest numbers are heartening, but preliminary—and the economy could continue to slip for another quarter or so, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.
Economic growth in China continued to slow—as expected—with second-quarter GDP, announced today, growing at a 7.6% annual rate. That was down from the 8.1% rate in the first quarter and from 9.5% in the second quarter of 2011. But it was what economists had been projecting in the last few days.
So, no negative surprises, and a big sigh of relief that is helping propel stock market rallies from Frankfurt to New York. The German Dax index is up 2.15% and the S&P 500 is up 1.47% as of 12:45 p.m. New York time.
Besides the obvious relief that China’s economy hasn’t fallen off a cliff, today’s rally is founded on an optimistic reading of some numbers below the headlines. You can conclude that signs point to this quarter as a bottom for China’s economy, and that efforts to stimulate growth are starting to gain momentum.
For example, data on bank lending published yesterday show that new loans from China’s banks climbed to 920 billion yuan in June, up from 793 billion yuan in May and above projections. Last month, new bank lending fell below expectations, raising fears that banks and borrowers weren’t responding to government directives to lend and borrow more to stimulate the economy. The increase in lending follows on two cuts to benchmark interest rates by the People’ Bank of China.
Similarly, real estate investment showed signs of a potential turn in June. For the first half of 2012 as a whole, real estate investment in China grew at just a 16.6% rate, a huge drop from the 32.9% growth seen in the first half of 2011.
But property sales grew at a 6.9% annual rate in June for the first increase in eight months, and mortgage loan growth turned positive as well, with June’s numbers taking first half growth to a 0.8% increase from a 2.9% decline in the first five months of the year.
I’ve been writing that China’s growth rate for this cycle is likely to show a bottom in the June or September quarters. I don’t think all this data adds to up a certainty that the June quarter will mark—at 7.6% annual growth—the low point in this cycle for the Chinese economy. It’s possible, but far from certain.
The bottom could still come in a bit lower and a bit later, in the September quarter. To turn this June from a potential bottom to an actual bottom, we’ll need more monthly data on loans, industrial production, exports, and real estate sales—and the third-quarter GDP numbers that will be forthcoming in early October.
I’d expect that China’s stocks will rally on optimism that the current data marks the bottom of the decline in growth, but that will be a relatively high-risk bet until we get confirmation from more numbers. (With European GDP numbers showing a deepening recession, it’s always lurking in the background to restrain any rally in China or the United States.)
I’d say today’s data is cheery, but I wouldn’t want to bet the house on it.