What slowdown? China thinks it'll have the last laugh

The numbers are looking pretty good for Chinese economy – its GDP growth of 9.5 percent came in higher than expected. This, in a sense, gives Beijing that added confidence and means there is more tightening to follow to get a better grip on prices.

[caption id=“attachment_40568” align=“alignleft” width=“380” caption=“Fighting inflation remains Beijing’s top priority, but any policy steps should avoid causing big swings in economic growth. Bobby Yip/Reuters”]  [/caption]

China’s Q2 growth may have missed out the first quarter mark of 9.7 percent by a whisker, but the fact that it still beat market expectations of 9.4 percent speaks a lot about its resilience. Industrial output growth is in a rebound mode, surging 15.1 percent in June from a year earlier. Making a short-term comparison, it picked up sharply from May’s 13.3 percent and trumped market view of 13.1 percent.

“The economic growth data is quite upbeat as industrial production was noticeably stronger than expected,” said Xu Biao, an economist with China Merchants Bank in Shenzhen. “So, we don’t expect any immediate relaxation in policies due to the strong GDP number, and the government may keep policies stable in the coming months.”

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The growth figures underlined the robustness of the world’s second-largest economy, thanks to the country’s rapid urbanisation, and could soothe investor concerns about a hard landing that would dent demand for global commodities.

With economic growth slowing but still within the official comfort zone, Chinese policy makers may keep their tightening policy to tame stubbornly high inflation, which quickened to a three-year high of 6.4 percent in June, driven by soaring food costs.

Fixed-asset investment grew 25.6 percent in the first six months from a year earlier, while retail sales expanded 16.8 percent, showing that domestic demand still held up relatively well despite policy tightening.

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Analysts expect more rises in interest rates or banks’ reserve requirement ratios, although few dispute the current policy tightening cycle is near its end.

Fighting inflation remains Beijing’s top priority but any policy steps should avoid causing big swings in economic growth, Chinese Premier Wen Jiabao said in comments published on Tuesday.

Last Wednesday, China raised rates by 25 basis points – the third such increase this year – which took the one-year bank deposit rate to 3.5 percent.

The central bank has raised benchmark interest rates five times since October and lifted banks’ reserve requirement ratio – its preferred policy tool so far – nine times.

(With inputs from Reuters)