Chinese Growth Beat Expectations In 2Q14, Thanks To Stimulus

China’s GDP grew +7.5% y/y in 2Q14, accelerating from +7.4% in the prior quarter. The National Statistics Bureau also reported that the sequential GDP growth soared to +8.2% q/q, saar in the second quarter, compared with +6.1% in the priod quarter.. On quarterly basis, growth accelerated to +2% q/q from an upwardly revised +1.5% in 1Q14. China’s GDP grew more than expected in 2Q14, thanks to the government’s fiscal and monetary stimulus. Meanwhile, economic data in June suggested that growth fixed asset investment and industrial production accelerated, indicating the stimulus began to take effect during the period. While the government probably feels less imminent to adopt further easing given the encouraging second quarter result, more stimuli are still needed as downside risks to growth remained, evidenced by slowing electricity production growth and a drop in the government’s VAT revenue.

The better-than-expected economic growth last quarter was mainly driven by the fiscal and monetary easing measures. Note that acceleration of IP growth to +9.2% y/y (from May’s +8.8%) and FAI growth to +17.6% (from +17.0% in May) in June suggested that the government’s measures, focusing on increasing spending in infrastructure and social housing, were having an impact. Indeed, today’s data were consistent with the strong monetary data released yesterday. According to the PBOC, M2 growth rose to +14.7% in June from +13.4% in May while new RBM loans rose to RMB1 080B, compared with the RMB 871B in May and expectations of RMB 955B. The stock of TSF increased +16.4% y/y with bank loans and non-bank loans rising +13.2% and +23.9% respectively. On the fiscal front, national fiscal expenditure grew 24.6% y/y and 26.1% in May and June respectively, compared with the +10% growth in the first 4 months. The momentum should continue as we move to the third quarter to support spending and investment.

Yet, we believe the biggest challenge against China’s economic growth comes from the real estate sector. Concerning home sale, it was reported that the decline in new home sales in floor space terms and value terms eased to -3.5% and -5.3%, respectively, in June, from contraction of -10.8% and -11.3%, respectively, in May. However, new home starts contracted -13.8% y/y in June, worse than the -12.0% decline in May. Indeed, looking into the details of the FAI data, year-to-date real estate investment grew +14.1% y/y in the first half, moderating from the +14.7% gain in the first 5 months of the year.

The data today portrayed a positive outlook of China’s economy and the growth has likely bottomed in the first quarter. Assuming the government would continue to implement its mini-easing measures, growth in the second half should continue. We expect growth in 3Q14 to increase modestly, followed by a faster acceleration in 4Q14, due to base effects.

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