Slower China growth is indicated as the headline figure increased at its lowest quarterly rate in three years, according to official data released at the weekend. Other indicators, however, gave mixed readings, leaving the prospect of further economic stimulus finely balanced.

Gross domestic product (GDP) increased 7.6 per cent in the second quarter over the same period last year, and 1.8 per cent over the first quarter this year. It is the sixth consecutive quarter that the slower China growth rate has declined year on year. The government in March lowered its full-year GDP growth target to 7.5 per cent, a decline from the 8 per cent formal norm set in previous years stretching back to 2005.

For years, a commonplace argument has been that the Chinese economy has to grow at least 8 per cent annually if sufficient jobs are to be created to contain the risk of social unrest. In the past year or so that number has been scaled back to 7.5 per cent. Official targets are also generally understood to be figures with which the government would be happy, and they are often exceeded by the final statistics themselves. Thus the consensus expects the economy to rebound in the second half of the year, possibly even exceeding 8 per cent growth in GDP slightly for the entire year. By comparison, in 2011 the economy grew 9.2 per cent over 2010, and 10.4 per cent over 2009 in 2010.

Even so, the latest data raised the prospect of the government taking further steps to stimulate the economy. Premier Wen Jiabao at the weekend said “momentum for a stable rebound in the economy has not yet been established” while “authorities would ‘unswervingly’ maintain and enforce property controls so as to prevent prices from rising again,” Xinhua news agency reported.

Government efforts to curb property speculation have led to price falls that have continued in spite of an apparent recovery in home sales, helping to hold down overall inflation. The Consumer Price Index (CPI) inflation gauge for June declined more than expected, to 2.2 per cent year on year, from 3 per cent, 3.4 per cent, and 3.6 per cent respectively for the three previous months, according to the National Bureau of Statistics. The Producer Price Index (PPI) was down 0.7 per cent in June following declines of 1.4 per cent, 0.7 per cent, and 0.3 per cent respectively for the three previous months.

In March, the government announced a target of 4 per cent inflation for the year, and the decline in inflation will facilitate further monetary easing. The central bank may cut interest rates as many as two more times this year, China Daily quoted an economist at the State Information Center as suggesting—it cut them earlier this month for the second time this year—and the reserve requirement rate as many as three more times in addition to three cuts made since last November.

The mainstream view is that increased bank reserve requirements along with lower interest rates have brought housing demand back a bit and, interpreting that as a more general indicator, that slower China growth may be beginning to stabilize. “Stable” is a key word for the regime.

Wen opined that the economy was now operating at a “slower but more stable pace”, but still he called for its greater “vitality and dynamism” and warned that “hardship” would continue for some time even though “stabilization policies are working”.

However, Dong Tao of Credit Suisse Group in Hong Kong made the point to Bloomberg News that “[t]he question is not how deep the economy falls, but how long it will stay low,” because “China needs structural reforms, not just monetary or fiscal expansion.”

The Chinese authorities have already made it abundantly clear that their stimulus plans target China’s own current economic performance profile and are not designed specifically to promote global growth as they were in 2008-09. Measures introduced several months ago included tax and bank interest rate cuts, as well as acceleration of the approval process for infrastructure construction (particularly subways, airports and railroads).

Nevertheless, fixed-asset investment continued at the lower level at which it has run all year, with 20.4 per cent year-on-year growth in June, about average for the first six months, after rates of 23.8 per cent were registered in 2011 and 2010.

Slower China growth in industrial production in June fell from May’s 9.6 per cent level to 9.5 per cent year on year, but bank loans increased unexpectedly to 919 billion yuan (US$144 billion) in June from 793 billion yuan in May, also beating the 880 billion consensus estimate from a Bloomberg News survey of specialists. A $63.4 billion trade surplus was posted in the second quarter, far outstripping the first quarter’s $670 million surplus, according to the General Administration of Customs. Total exports were up 11.7 per cent in June over the year earlier figure, while imports rose 6.3 per cent.

The Shanghai Stock Exchange Composite (SSEC) index closed the week down 1.7 per cent at 2,186, its fourth consecutive weekly decline. The present level is a little less than 2 per cent higher than its close on January 5 this year, which was the index’s lowest level since March 2009. Below that, the next important support is at 2,101. Resistances to the upside currently show themselves at 2,242 and 2,320. Technical indicators at present predominate somewhat on the downside in the short and medium term, with a bit more ambivalence in the long term.

[First published in Asia Times Online.]