China second quarter GDP growth seen cooling to seven-year low, more stimulus expected

By Kevin Yao

BEIJING (Reuters) – China is expected to post its weakest quarterly economic growth since the global financial crisis on Friday, raising the heat on policymakers to take more steps to bolster demand as Britain’s decision to leave the EU adds to global uncertainties.

Chinese leaders are trying to support growth to prevent widespread job losses and debt defaults, but they are also facing pressure to push through painful structural reforms to put the world’s second-largest economy on a more balanced and sustainable footing.

While fears of a hard landing in China have eased, investors fear a further slowdown and any major fallout from Brexit would leave the world even more vulnerable to the risk of a global recession.

China’s economic growth likely slowed to a fresh seven-year low of 6.6 percent in the second quarter, down from 6.7 percent in the first, according to a Reuters poll of 61 economists.

That would be the weakest pace of expansion since the first

quarter of 2009, when growth fell to 6.2 percent.

Premier Li Keqiang has said that second-quarter economic growth remained largely steady, but analysts expect more support measures in the coming months as private investment falters, forcing the government to do more of the heavy lifting.

Shocks from Brexit could also hurt one of China’s biggest export markets and spark more swings in its financial markets. Shanghai stocks are still struggling after a crash last year, while the yuan has slid to 5-1/2 year lows, rattling investors.

“There won’t be any big surprises in Q2 GDP data, but economic growth could slow further in the second half,” said Nie Wen, an economist at Hwabao Trust in Shanghai.

Nie said he expected the People’s Bank of China (PBOC) to cut banks’ reserve requirement ratios (RRR) two or three times later this year to spur more lending.

ING economist Tim Condon said disappointing data “could see the consensus forecast for economic growth revised lower and the forecast for policy interest rate cuts – one 25 basis point cut in the fourth quarter – brought forward or revised higher.”

The PBOC last cut RRR in February as part of a policy easing cycle that has also included six interest rates since late 2014.

But analysts believe the central bank may not rush to ease policy given the government is leaning more on fiscal policy to support growth.

Investment by state-owned enterprises (SOEs) jumped over 23 percent in January-May from a year earlier, which some analysts fear is undermining Beijing’s efforts to contain rising debt levels in the economy. Growth in private-sector investment in January-May slowed to 3.9 percent – the weakest on record.

Beijing’s growing reliance on SOEs could also delay much-needed restructuring of the sector, where many firms are bloated, loss-making and inefficient.

SCEPTICISM

The government is aiming for economic growth of between 6.5 percent and 7 percent this year. The economy grew 6.9 percent in 2015, its slowest rate in 25 years.

The National Bureau of Statistics is due to release second-quarter GDP data at 10 am (0200 GMT) on Friday.

Industrial activity did pick up early in the quarter, thanks to a stronger property market and higher commodity prices.

But a surprisingly resilient reading could reinforce scepticism about the reliability of Chinese official data. Some market watchers already believe current growth is much weaker than government readings suggest.

China’s statistical bureau has revised up the size of 2015 gross domestic product by 1.3 percent by adding research and development (R&D) spending, which has only affected economic growth rate fractionally.

Data this week showed China’s exports fell more than expected in June as global demand remained stubbornly weak, while imports also shrank more than forecast, suggesting the impact of a flurry of stimulus measures may be fading.

China will also release activity data for June, which could reinforce expectations of slower growth in the second half.

Fixed asset investment growth likely cooled further to 9.4 percent for January-June. The 9.6 percent pace recorded in the first five months of the year was the first time investment expanded by only single digits since 2000.

Industrial output likely grew 5.9 percent in June, down only slightly from May, while retail sales growth was likely steady in June at 10 percent.

(Reporting by Kevin Yao; Editing by Kim Coghill)