Growth hit target, what next?

The toy section at a supermarket in Yichang, Hubei province. Consumption accounted for a record 60 percent of China's GDP in the first half of the year. [Photo/China Daily]

Q2 growth helped by strong financial service activity and property sales

China's headline GDP growth stayed flat at 7 percent year on year in the second quarter, though its sequential growth picked up, helped by a notable uptick in the services sector. The latter is likely to have been helped by both a buoyant equity market and strong recovery in property sales.

Export growth was disappointing due to weaker-than-expected global demand while property construction and investment stayed sluggish through second quarter. Intensifying government policy support towards the end of first quarter helped to stabilize growth somewhat from April onwards. After stumbling in April and May on local government financing difficulties, infrastructure investment rebounded in June thanks to strengthened fiscal policy and credit support. As a result, China's economy stabilized.

The central government's focus on improving fiscal funding support to public projects in recent months has started to pay off in June, as infrastructure investment accelerated in June for the first time in three months. This is collaborated by stronger-than-expected credit growth in June, aided by relaxation of loan-to-deposit ratio (LDR) on the credit supply side and more government infrastructure spending on the credit demand side.

Property sales growth accelerated for the third straight month, to a robust 16 percent year-on-year in June, taking full Q2 sales growth from Q1's negative 9 percent year on year to positive 13 percent year on year, helped by property easing policies and declining interest rates.

Real estate construction, however, continued to struggle given China's still large inventory overhang. New housing started contracted again in June by 15 percent year on year despite last year's low base as developers continued to focus on working through their inventories.

Both construction and investment cooled further in Q2, continuing to weigh on industrial and mining production and investment.

Policy support to continue

Given sliding property construction and weak real economic activity, the government has intensified policy support in the past couple of months, paying special attention to increased funding for infrastructure projects amid financing difficulties at the local level.