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 Policymakers had already unleashed a series of measures to pull
stocks out of a 30 percent nosedive and appeared to have succeeded
last week, but Wednesday's tumble could reawaken concerns over the
government's ability to manage the economy.
The day began on a positive note with the growth figures and monthly
activity data that also beat expectations across the board, with
factory output hitting a five-month high, following reports of
increased bank lending on Tuesday.
As the National Bureau of Statistics released the upbeat figures, it
described the stock markets as key to economic stability. As if on
cue, the key indexes, already down in morning trade, fell more than
4 percent in the afternoon.
The CSI300 index eventually ended down 3.5 percent, while the
Shanghai Composite Index lost 3 percent.
"Investors liquidated their positions as the GDP data failed to
impress," said Steven Leung, a director at UOB Kay Hian in Hong
Kong.
It has been a difficult year for the world's second-largest economy,
with slowing growth in trade, investment and domestic demand
compounded by a cooling property sector, deflationary pressure, then
the equity market panic from mid-June.
Beijing will need to keep providing liquidity to the stock exchanges
and cut the cost of corporate financing, which remains far higher
than returns on investment for many companies.
Economists have also called for more direct fiscal stimulus to help
support heavily indebted local governments.
Wednesday's data showed fiscal expenditure rose 13.9 percent on an
annual basis in June, a sharp rise from May's 2.6 percent but well
below April's 33.2 percent spike.
FAITH IN THE FIGURES
Some analysts, who on average had tipped GDP to rise 6.9 percent,
question the accuracy of official data, implying the numbers are
more about reassuring investors than true reflections of
performance.
For example, June power output only increased 0.5 percent
year-on-year, though factory output climbed 6.8 percent.
The statistics bureau rejected suggestions that figures were being
inflated.
It is not only the government reporting a warmer second quarter; the
recent independent China Beige Book survey also reported signs of a
broad-based recovery for the period, which it said was largely
driven by growth in the interior provinces.
"While actual growth is almost certainly a percentage point or two
slower than the official figures show, there are good reasons to
think that the latest figures are mirroring a genuine
stabilization," wrote Julian Evans-Pritchard, economist at Capital
Economics in Singapore.
"There is growing evidence of an improvement in the wider economy."
The statistics bureau described the nascent recovery as "hard won"
and noted it was driven primarily by an increase in domestic
consumption, which produced 60 percent of China's economic growth in
the first half, compared with 35.7 percent for capital formation and
4.3 percent from net exports.
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Consumption contributed 51.2 percent to GDP growth in 2014, so the
rise will be welcomed by a government that is trying to reduce its
dependence on exports in favor of domestic demand.
CREDIT QUESTIONS
The statistics bureau warned that recovery required more support to
consolidate.
"We must also take note that domestic and the external economic
environment remains complex, and the global economic recovery is
tortuous and slow," it said.
Even so, bureau spokesman Sheng Laiyun predicted further
improvements in the second half as previous policy measures,
including several interest rate cuts, take effect.
Andrew Colquhoun of Fitch Ratings also expects an improvement in the
rest of the year.
"The resilience of retail sales in June is a further encouraging
sign that downside risk, while not negligible, is receding, despite
recent equity-market volatility."
Data on Tuesday showed bank lending increased sharply in June,
thanks to central bank support.
However, economists worry that many companies and individuals
borrowed heavily to buy stocks in the first half, so the sharp stock
market decline could inhibit banks' ability to lend.
Before the market plunged, key indexes had risen nearly 60 percent
in the first half, which some economists estimate added more than a
percentage point to total GDP growth in that period, mostly by
boosting activity in the financial services sector.
If that boost peters out now the market appears to have run out of
steam, it could drag on third-quarter figures.
The government has forecast economic growth of around 7 percent for
2015, which would be the weakest rate in 25 years.
(Additional reporting by Lu Jianxin, Koh Gui Qing, Winni Zhou and
the Shanghai Newsroom; Writing by Pete Sweeney and Will Waterman;
Editing by Alex Richardson)
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