Thursday, July 18, 2013

China's economy slows for second straight quarter, testing reforms

Economy

July 15, 2013 at 7:54 AM ET

A Chinese man rides a delivery bike past a propaganda bill board with the words "China, Forward!" in Beijing, China, Monday, July 15, 2013.

Ng Han Guan / AP

A Chinese man rides a delivery bike past a propaganda bill board with the words "China, Forward!" in Beijing, China, Monday, July 15, 2013.

China's economic growth in the second quarter of the year may not have slowed as much as some had feared, but a large degree of uncertainty about the outlook for the world's second biggest economy remains, strategists say.

Data on Monday showed the Chinese economy grew 7.5 percent year on year in the June quarter, in line with expectations, but down from 7.7 percent in first three months of the year to mark the second straight quarter of slowing growth.

"Who knows if 7.5 percent [growth] is sustainable? It really is a question of watching the data and where it stabilizes is what's important for the market," Simon Warner, head of macro markets at AMP Capital, told CNBC Asia's "Cash Flow."

(Read More: Just how low will China allow growth to go?)

"We have a real situation in China where nobody really knows where Chinese growth is going to settle down in the coming quarters," he added.

The China gross domestic product (GDP) data bought some relief to markets, which had braced for a weaker-than-forecast number after recent data sparked fears of a sharp slowdown in growth.

Asian stock markets were a touch firmer after the GDP release, while the China-data sensitive Australian dollar hit a session high of about $0.9109.

(Read More: Why aren't markets rallying over China's GDP?)

In a statement, the China statistics bureau said economic performance in the first half was stable, with economic indicators within a reasonable range.

New Premier Li Keqiang has been prominent in pushing for economic reform over fast-line growth, suggesting the government is in no rush to offer fresh stimulus to revive an economy in a protracted slowdown.

With the latest GDP data, China's growth has slowed down in nine of the last 10 quarters.

The government's official growth target for 2013 is 7.5 percent, impressive by world standards but it would be the slowest pace in 23 years for China.

The main worry for China's leaders is if the economic slowdown leads to high unemployment that could spark social unrest. So far government officials say employment is stable.

So for now, economists do not see any major stimulus or policy shift and instead expect the government to tough out the slowdown as they pursue a longer-term vision of reforming the economy towards consumer-led, rather than export- and investment-led growth.

(Read More: Why China delivered such a big miss in trade data)

China's full-year growth was 7.8 percent in 2012 and the government targets growth of 7.5 percent for 2013, which would be the slowest in 23 years, according to Reuters.

Analysts at Nomura said that while they maintained their 2013 GDP forecast of 7.5 percent, they had lowered their 2014 forecast to 6.9 percent from 7.5 percent after Monday's GDP report ? partly on an expectation that China's government would lower its official growth forecast for next year.

"In the U.S. we can't predict what's going to happen in three months' time and here we have folks saying growth will be 7.5 percent," said Bill Smead, CEO at Smead Capital Management. "And that's fantastic but I'd like to take them [policymakers] into some other arena so I could make some money out of their ability to predict things so exactly."

Last week, the International Monetary Fund (IMF) highlighted slowing Chinese growth as one of the three main threats to global economic growth.

? By CNBC.Com's Dhara Ranasinghe; follow her on Twitter @DharaCNBC. Reuters contributed to this report.

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