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The announcement that China’s economy expanded by an annual 7.5 per cent in the three months to June came as a positive surprise. True, this figure is well below the double-digit growth rates recorded for much of the past decade. Yet after the recent string of weak data, investors had feared a more abrupt slowdown.
Of course, the reliability of China’s national accounts remains a matter for debate. Other indicators, such as railway freight, paint a less rosy picture than the official estimates of gross domestic product. But to the extent that government figures can be trusted, markets should draw some comfort from the fact that the slowdown has stabilised. The economy did marginally better in the second quarter than in the three months to March.
Dig below the headline figure, however, and it is clear why 2013 remains a tricky year for China. Beijing wants to move away from its investment-led growth model. Yet in the three months to June, investment remained the single largest driver of economic expansion. Its contribution to growth was twice as large as consumption. Were local governments and state-owned enterprises to stop pouring cash into new buildings and roads, growth could suddenly stop.
Under President Xi Jinping, China has shown no appetite for a grand stimulus matching the heroics of 2008. This reluctance appears wise. A new monetary stimulus would lead to more wasteful spending by the local authorities. It would also risk inflating a new property bubble. Since the labour market remains robust, a carefully managed slowdown is unlikely to lead to large-scale social tensions.
Many officials in the provinces hope that Beijing will ride to the rescue. The challenge for the leadership is to make it clear that 6-7 per cent growth rates are the new normal. This helps to explain last week’s slip of the tongue by Lou Jiwei, finance minister. He appeared to hint that Beijing had revised down its 7.5 per cent growth target. Government-friendly media edited his words retroactively but this was after the statistical horse had bolted.
Some will blame Mr Lou for poor communication with the markets. But since China is a relatively closed economy with stringent capital controls, it makes sense for the leadership to put the domestic audience first. The lesson for investors is to concentrate their minds on how the economy does rather than what ministers say. There is no better way to sift reality out of the propaganda.