China Q2 GDP Growth At 7.6%: Signals Better Second Half

The world’s second-biggest economy, China is looking in bad shape as the country has witnessed its slowest growth since 2009 and the sixth consecutive fall. The economy for the June 2012 quarter has grown at 7.6 per cent as compared to the same period last year. And for the first half of the year the Chinese economy has grown at 7.8 per cent. Even though it was the slowest pace of growth in three years but it is in line with the market expectations and the government’s projected growth of 7.5 per cent for the full year 2012.

China's Growth Slowing Down


After having a close look at the GDP component, the growth of various sectors paints a mixed picture and signaled steady growth. On one hand agricultural production showed good momentum, industrial production was in the moderate growth range with enterprise profits showing a YoY decrease. The industrial growth in the first half has moderated by 3.8 to 10.5 per cent as compared to the same period last year. Also, the profits made by the industrial sector declined by 2.4 per cent on a YoY basis. Among the 41 industrial divisions, 26 divisions registered year-on-year increase in profits, 13 divisions witnessed reduction in profits and one division turned into profit from earlier losses.

Exports Continue To Decline 
The export growth in the first half cooled to 9.2 per cent, down from 24 per cent in the first six months of 2011, as Europe’s measures and government debt burdens limited shipments. Also, the falling housing market continued to be a drag on demand as well.

Positive Fixed Asset Investment
One major thing which showed positivity was the investment in fixed assets which reflected steady growth – a signal that the economy is stabilising. The fixed asset investment in newly-started projects increased by 23.2 per cent in the first half of this year. The data showed a persistent weakness but not a steep decline and that is a positive factor. The Chinese officials may refrain themselves from any major stimulus measures but may continue to announce various monetary accommodations to sustain the growth curve. Sheng Laiyun, spokesperson of the National Bureau of Statistics (NBS), was quoted in the media saying that the numbers signalled “steady growth”, thus dispelling any concerns.

Improved Retail Data 

The data of retail sales showed improvement in the first half of the year.  In June, the total retail sales of consumer goods rose by 13.7 per cent year-on-year.

Stable Outlook In second Half 
Looking at the growth numbers, the Chinese officials have said that the economy is looking steady and may see further improvement in the coming quarter. Various monetary measures will continue to be used to bring the economy on the growth path to achieve the projected target of 7.5 per cent growth in 2012. The Chinese premier, Wen Jiabao, was quoted saying, “The momentum for a rebound hasn't been established yet but given the recent rate cuts, and the scope for more fiscal policies, it’s likely that we have seen the bottom of the Chinese cycle, and we should now see its economy re-accelerate over the second half of the year.”

We believe China has already cut the interest rates twice in last two months to lower the borrowing cost in the economy and has also slashed the reserve requirement ratio three times last year to provide enough liquidity in the financial system. And going forward too it may use these tools to keep the growth intact at these levels.

Chinese slowdown to impact base metal prices
We believe that the impact of the slowing Chinese economy will surely impact the base metals prices as it is the world’s largest consumer of base metals like lead, zinc, aluminum, nickel, copper, etc. However, the impact will be lower in India as it is not a big exporter of base metals but a net exporter of iron ore which may see some pressure.  The commodity prices will struggle to gain any positive momentum in the international market over next quarter. China is the world’s largest consumer of ZINC also and with the slowdown in the economy and slowdown in the auto sales in China we can see fall in the zinc prices. And this may also impact the margins of India's major zinc producer  'Hindustan Zinc' in coming quarter.