Econintersect: China has delivered its first preliminary GDP growth report for second quarter 2014. The economy grew by 7.5% year-over-year, up slightly from the final first quarter growth of 7.4%. The quarter-over-quarter growth was 2.0% and for the entire first half of 2014 GDP was 7.4% higher than for the first half of last year. Because growth is strong in key areas, such as industrial output (+9.2%) and retail sales (+12.4%) the outlook for the second half of the year is good, supported by high loan issuance (up 19% in June from May) and 14.7% increase in the broad money supply, M2, from June 2013.
The increase in debt and growing M2 are factors that Michael Pettis says are longer-term negatives for China because it postpones the day that the bad debts accumulated during the recent boom years will be written down. See GEI Analysis: Bad Debt Cannot Simply Be “Socialized”.
But some think the current actions by the government are not harmful. Lu Ting, an economist at Bank of America Merrill Lynch, quoted by the Financial Times is one in that camp:
“The major driver is Beijing’s stimulus measures focusing on increasing spending on railway and social housing with its own money. The negative impact of the stimulus on the financial system is thus relatively small.”
Lu Ting seems to recognize the difference in risk between private debt and government debt when their is a sovereign currency involved.
But Lu Ting’s assurances seem somewhat fickle as Chinese bank loans and other forms of credit grew at their fastest pace for three months in June. In addition, fixed asset investment (+17.3%) real estate investment (+14.1%) are still growing faster than retail sales (12.4%). A rebalancing away from very high investment and toward more consumption is the generally recognized reform that is need to keep the Chinese economy from crashing. Until investment growth and consumption growth at least reach the same level the rebalancing is getting further unbalanced.
- China 2nd Quarter GDP Rises 7.5% (Dow Jones Business News, Nasdaq.com, 15 July 2014)
- China’s second-quarter GDP rises 7.5% (Lucy Hornbey, Financial Times. 16 July 2014)