7-17-09, 9:49 am

Original source: Global Times

China’s gross domestic product (GDP) grew 7.1 percent in the first half from a year earlier, with a year-on-year growth rate of 7.9 percent in the second quarter, close to the government's target rate of eight percent, the latest official figures show.

As economists expressed their hope that China will achieve an eight percent growth rate this year, some stressed the need to optimize the nation's economic and investment structures.

The figure for the April to June period, announced yesterday by the National Bureau of Statistics (NBS), far exceeds the 6.1 percent gain in the first quarter, which was the lowest in almost a decade as exports shrank sharply.

Among the world’s 10 biggest economies, China is the only one still expanding. The US is expecting a predicted contraction of between 1 and 1.5 percent, with its unemployment rate in June hitting a 26-year high of 9.5 percent, and as the index of consumer confidence continues dropping.

Europe's biggest bank, HSBC Holdings, revised yesterday its China GDP forecast for 2009, from 7.8 to 8.1 percent. Just a few months ago, many economists thought China's growth this year would be in the 6-7 percent range.

Asian markets are trading up by a little more than 2 percent, helped by the economic reports coming out of China.

'The downturn of China's economy, starting from the second half of last year, has been successfully reversed, and the overall economic development is improving steadily,' Yao Jingyuan, chief economist with the NBS, told the Global Times. 'It's leading the turnaround in the global economy.'

Since November, the government has adopted a series of stimulus measures, including a 4 trillion yuan investment package, tax cuts and consumer subsidies, to maintain growth and employment.

Benefiting from the massive government spending in the construction of railways, roads and infrastructure, the fixed-asset investments rose 33.5 percent in the first six months, the most in five years.

Ren Tianyun, deputy director of China's Macro Economy Institution, affiliated with the National Development and Reform Commission, expressed confidence that the eight percent target, a level believed to be the minimum to maintain full employment in China, is in sight.

'Since many medium- and long-term projects have started, the follow-up investment will be a large amount, and the investment growth can continue,' Tian told the Global Times.

A W-shaped recovery

Officials and scholars, while saying that positive factors are increasing, also noted that many problems with the figures remain.

'We still face difficulties, including shrinking external demand, falling corporate profits and declining fiscal revenue,” NBS spokesman Li Xiaochao said. 'We're still facing great pressure of generating jobs.'

Tan Yaling, an economist with the Institute of International Finance at the Bank of China, said that the current GDP growth is mainly driven by a surge in public investments, while domestic consumption and exports don't contribute a lot.

'The extraordinary increase of bank lending, public investments and currency issues is an emergent response to the global financial crisis,' Tan said. 'The government should optimize the economic structure to ensure sustainable growth.'

The central bank has pumped three times more money into the economy in the first half of this year than in the same period last year, with total bank lending hitting a record 7.37 trillion yuan.

Tan also expressed concerns about the imbalanced investment structure. 'The public investment and loans were mainly targeting State-owned companies in major industries while neglecting most small and medium-sized ones.'

'In the following half year, the government should encourage more investment from private businesses and promote domestic consumption,' Zuo Xiaolei, chief economist at China Galaxy Securities, told the Global Times.

Tan said she expects the ongoing recovery to be W-shaped, instead of a V-shape mentioned by many economists, as there might be some uncertainties brought by fluctuations in investment and credit policies.

The People's Bank of China sold one-year and three-month bills yesterday at the highest yields this year, guiding money-market rates higher. The action was interpreted by many economists as an attempt to slow record growth in money supply.

'That is the question for global markets – when will we begin to see tightening?' asked Andrew Orchard, regional strategist at ABN AMRO in Hong Kong, according to Reuters.

'It will be difficult to raise interest rates, but there could be some pressure on banks to cut back on lending, which we would never know about,' Orchard added.

However, Xing Ziqiang, an analyst at CICC securities in Beijing, said the strong data will not give authorities enough confidence to put on the brakes, as consumer and production deflation are getting worse than in the previous month.

'The recovery is still not on solid footing,' he said.

Yao, chief economist at NBS, called for continuity and stability in government policy, as, he argued, exports are still shrinking and the world economy can hardly hit bottom by the end of this year.