China state fillip sends GDP soaring by 7.9%

Jane Macartney in Beijing

China’s economy rebounded in the second quarter, boosted by a surge in state spending and in bank lending, putting the country on course to lead the world out of the worst global downturn since the Great Depression.

Economists had expected the economy to show some strong improvement as a huge 4 trillion yuan (£365 billion) government stimulus package announced last November began to take effect, but few had foreseen that annual gross domestic product (GDP) growth would accelerate in the second quarter by 7.9 per cent, up from 6.1 per cent in the first quarter.

That made China the world’s the best-performing big economy. It is now the third biggest in the world.

There was growth from several sectors of the economy, including investment in fixed assets in urban areas in the first half and industrial production in June. Retail sales, a rough proxy for consumption, rose 15 per cent in June from a year earlier after a 15.2 per cent increase in May.

Zhu Jianfang, chief economist of Citic Securities, said: “The data showed the economic recovery is stronger than expected. There will be no suspense about achieving the Government’s goal of 8 per cent GDP growth this year.”

The 8 per cent figure is crucial to the ruling Communist Party, which regards that number as the minimum needed to hold down unemployment.

Li Xiaochao, spokesman for the National Bureau of Statistics, said that the impact of the stimulus package had been remarkable. “Our economy is continuing to turn for the better and there are more and more positive factors. We see more people shopping and prices beginning to rise. The economy is recovering and the recovery is intensifying. All the Government’s policies have worked together to help us overcome the financial crisis.”

Some economists said the data showed that China had achieved a V-shaped recovery, with a carefully managed shift to greater domestic demand helping to offset the plunge in exports. Since 1978, China has averaged GDP growth of close to 10 per cent a year, but the Government has had to ramp up spending and shift to a loose monetary policy to put the country on track for its official target for 2009.

In addition, consumer prices in June fell 1.7 per cent from a year earlier, giving Beijing a freer hand to keep spending without increasing inflationary pressure.

Mr Li warned that many problems were still waiting in the wings. “Policies to maintain growth have achieved very clear results, but the foundation for recovery is still not solid. The recovery is not fully balanced so there are some regions that have not done as well as others,” he said.

Over-reliance on the stimulus package could have negative consequences. Ben Simpfendorfer, China economist at RBS in Hong Kong, said: “The important message here is that while the pace of growth is accelerating, the quality is deteriorating. Growth is too reliant on public investment and residential investment. It’s not sustainable.” (Jane Macartney, The Times).  http://business.timesonline.co.uk/tol/business/economics/article6715807.ece

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