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China's Q2 GDP and June data all came in better than expected, pointing to more signs of stabilization. The official Q2 GDP printed a growth rate of 7.0% y/y and 7.0 q/q saar, above expectations (consensus: 6.8%). Fixed asset investment (FAI) growth held up at 11.4% y/y YTD, supported by infrastructure investment, while the slowdown in property investment stabilized (4.6% y/y YTD).
Retail sales growth recovered to 10.6% y/y from 10.1% (Q1: 10.5%). Today's data followed stronger trade in June, with export growth turning positive for the first time since March and the import contraction narrowing. Industrial production growth rose to 6.8% y/y from 6.1%, the fastest pace in H1 15. The activity data are consistent with stronger-than-expected money growth and credit expansion, suggesting the earlier policy easing measures have started to take hold.
Meanwhile, China's leverage-driven equity boom-bust poses small downside risks to growth. While a significant negative impact is not expected from the recent stock market correction, the risk is tilted slightly to the downside, given the strong correlation between financial services' fast-rising contribution to growth (1.3pp in Q1 and 1.4pp in Q2 versus 0.7pp on average in 2014) and stock market returns.
On the other hand, the China's equity market is not yet a major source of corporate financing, accounting for less than 5% total social financing, compared with more than 10% from the bond market and 75% from bank lending. Also a significant negative wealth effect is not expected from the stock market correction, given overall the stock market gain is still positive YTD. Chinese households on average hold less than 20% of their financial wealth in stocks, with high levels of household savings helping smooth out consumption.
Barclays notes:
- We believe there are concerns on the pace of financial market reforms following the sharp stock market correction, as evidenced by the suspension of IPOs.
- Nevertheless, our view is that as long as systemic financial risks are closely monitored and contained, which seems to be the case, we do not expect a significant delay in major reforms, including capital account liberalization.
- We maintain our GDP growth forecast of 6.8%y/y for the full year and look for an Lshaped growth profile in 2015.
