UPDATE 2-China growth picks up as stimulus pays off, but more support may be needed

Wed Jul 16, 2014 1:00am EDT

Related Topics

* Q2 GDP growth 7.5 pct y/y, up from 7.4 pct in Q1

* Government stimulus measures shored up activity

* June activity data may pick up but property weighs

* More policy help seen needed to keep growth on track (Adds details, official and analyst quotes)

By Kevin Yao and Xiaoyi Shao

BEIJING, July 16 (Reuters) - China's economy grew slightly faster than expected in the second quarter as a burst of government stimulus paid dividends, but analysts said Beijing will likely need to offer further support to meet its growth target for 2014.

Analysts remain cautious about China's economic outlook, noting that the pick-up in growth was driven more by government support than a genuine recovery in momentum, as evidenced by a surprising surge in lending by state-controlled banks in June.

The world's second-largest economy grew 7.5 percent in April-June from a year earlier, the statistics bureau said on Wednesday, just ahead of a median forecast of 7.4 percent in a Reuters poll.

A raft of stimulus measures helped lift the pace from an 18-month low of 7.4 percent in the first quarter, offsetting the drag from weak exports and a cooling property market.

"The recovery is quite dependent on government support. So I think the government can choose either to tolerate lower growth, or do more stimulus to achieve their growth target," said analyst Chang Jian at Barclays Capital in Hong Kong.

The unexpectedly hefty increase in bank loans in June was taken as a signal of Beijing's alarm at the slowdown, and how far it is prepared to go to get growth back on track to meet its target of 7.5 percent this year.

Chinese banks, which Beijing uses as a policy tool, lent 1.08 trillion yuan ($174 billion) in June, nearly 20 percent more than market expectations.

On a quarterly basis, economic growth picked up to 2.0 percent from a revised 1.5 percent in the first quarter, better than market expectations.

"We cannot be blindly optimistic, because the current situation is quite complicated," statistics bureau spokesman Sheng Laiyunfor the statistics bureau, told a briefing.

"The traditional industries are in the middle of adjustments and such pains could continue for some time, so the economy still faces some downward pressures," he said.

Part of that pressure stemmed from the housing market "adjustments", he added.

CREDIT-DRIVEN

Indeed, many economists believe the slowing property sector poses the biggest risk to the economy in the second half of the year, and thus could dictate whether Beijing sticks to a steady rollout of modest stimulus measures or considers more aggressive measures such as interest rate cuts.

Barclays' Chang expected the central bank to cut rates in the third and fourth quarters, while some other analysts believe it will stick to milder measures unless the property market sharply deteriorates.

Other data released on Wednesday showed growth in real estate investment slowed in the first half while sales and new construction fell, despite generous financing offered by banks. The sector accounts for over 15 percent of the country's annual gross domestic product.

Chinese policymakers have to walk a fine line between stepping up credit support for the economy, especially cash-starved smaller firms that are vital for job creation, while avoiding creating new local debt and fueling property risks.

Consumption contributed to 4 percentage points to the first half GDP growth of 7.4 percent, ahead of 3.6 percentage points from investment, the bureau said, in line with Beijing's pledge to reduce dependence on investment and exports in favour of consumption.

But analysts pointed to the fact that investment is still heavily funded by the government, rather than private businesses, despite Beijing's pledge to allow market forces to play a vital role in the economy.

"The investment share of GDP is increasingly supported by credit rather than businesses' retained earnings or the savings of entrepreneurs," said Bill Adams, senior international economist for PNC Financial Services Group.

Chinese banks are likely to make 9.5 trillion yuan ($1.5 trillion) worth of new yuan loans this year, their strongest lending surge since the 2009 financial crisis, a central bank official was quoted as saying on Tuesday.

Sheng Songcheng, the head of the statistics department at the central bank, was quoted by the Chinese financial news service Great Wisdom as saying that banks have increased lending to China's cooling property market this year in a show of "forceful" support.

STUCK ON THE STIMULUS TRAIN?

In recent months the government has rolled out a series of stimulus measures, including steps to reduce the amount of cash that some banks have to hold as reserves, instructing regional governments to quicken their spending, and hastening the construction of railways and public housing.

Though officials continue to describe such measures as "fine-tuning", Beijing has been steadily broadening the scope and depth of its assistance, as indicated by the lending upsurge and reported moves by local governments to ease home buying restrictions.

Top leaders have ruled out any massive stimulus as China struggles to deal with piles of local government debt, the hangover from a 4 trillion yuan ($644 billion) spending package implemented in 2008-09 to help cushion the country from the global financial crisis.

($1 = 6.2098 yuan) (Editing by Kim Coghill and John Mair)

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