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China Data From Home to Investment Show Hope for Growth

China’s weakest expansion in three years masked a surge in home sales and a jump in investment that show lower interest rates and banks’ reserve requirements may be starting to stabilize growth in the second-largest economy.

China’s economy advanced 7.6 percent in the second quarter from a year earlier while accelerating to a 1.8 percent gain from the previous three months, a government report in Beijing showed yesterday. The value of home sales rose 41 percent in June from May and first-half fixed-asset investment rose 20.4 percent, topping analyst estimates.

Preventing a deeper slowdown would bolster prospects for global growth under threat from Europe’s debt turmoil and a weakening U.S. labor market. Any recovery in China may be limited by Premier Wen Jiabao’s vow to prevent a rebound in property prices, banks still digesting record lending and higher wages that are pushing some companies to relocate.

“The hard-landing risk has fallen,” said Dong Tao, Credit Suisse AG Group’s Hong Kong-based head of Asia economics excluding Japan. At the same time, “we do not see much of a catalyst to drive the economy,” with “structural reforms” needed instead of measures aimed at boosting growth, he said.

Nomura Holdings Inc. yesterday cut its China growth forecast for this year to 8.2 percent from 8.4 percent and 2013 prediction to 7.9 percent from 8.2 percent, even as the bank projected a rebound in fourth-quarter 2012 expansion to 8.8 percent.

‘Extremely’ Complicated

Separately yesterday, the People’s Bank of China said weak global demand will hinder growth, with the world situation “extremely” complicated, according to the central bank’s 2012 financial-stability report.

Wen pledged to intensify fine-tuning of policies as downward pressure on the economy remains “relatively large,” according to a July 8 report by the official Xinhua News Agency. The premier said authorities will “unswervingly” sustain property controls and prevent a rebound in prices, Xinhua said.

Promoting investment growth is key to stabilizing the economic expansion, Wen said during meetings with economists and company executives July 9 and 10, according to a government statement.

“Policy makers are still worried about growth slowing down and getting close to their threshold of 7.5 percent,” said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura, who previously worked for the International Monetary Fund. “They will push investment up through bank lending so for the next several months new loans will continue to be pretty strong and infrastructure investment will pick up.”

Interest Rates

China reduced interest rates in June and July and has lowered banks’ reserve requirements three times since November. Zhang expects a cut in the reserve ratio as soon as this month and another in the final quarter.

Tim Condon, chief Asia economist at ING Financial Markets in Singapore, sees the central bank cutting the benchmark one-year lending rate again this quarter while making two 50 basis-point cuts in the reserve ratio.

“The government has enough capability to maintain economic growth, which is China’s biggest advantage,” Xiang Wenbo, vice chairman of excavator maker Sany Heavy Industry Co., said in a July 11 interview. China can stimulate expansion through fixed-asset investment and real estate and maintain a growth rate of 7.5 percent, Xiang said.

Not all the data yesterday pointed to growth. Downbeat signs included electricity generation that was unchanged in June from a year earlier. That’s the first time since May 2009 that production hasn’t increased, excluding a contraction in January this year as factories shut for a weeklong holiday.

Energy Intensities

The slump may be explained by different energy intensities of industries, said Il Houng Lee, the International Monetary Fund’s chief resident representative in Beijing.

The pace of gains in industrial output and retail sales also slowed. Export growth in the first half cooled to 9.2 percent, down from 24 percent in the first six months of 2011, a report earlier this week showed.

The yuan had the biggest weekly loss in six weeks, extending the decline this year to 1.3 percent against the dollar following a 4.7 percent gain in 2011. The benchmark Shanghai Composite Index was little changed yesterday and closed down 1.7 percent for the week, the fourth straight decline.

China averaged annual gross domestic product growth of about 10 percent throughout the 1990s and 2000s. Wen set an expansion target of 7.5 percent this year, below 8 percent for the first time since 2004.

The slowdown is partly the result of a decline in China’s potential growth rate after more than 30 years of high-speed expansion, Sheng Laiyun, spokesman for the National Bureau of Statistics, said at a briefing yesterday. He said bearish views on the economy are unfounded and that industrialization and urbanization will help sustain expansion.

“Investors need to understand that a part of the growth downshift is permanent,” said Stephen Jen, managing partner at SLJ Macro Partners LLP in London and former head of currency research at Morgan Stanley. “Those who are hoping for a strong recovery in the second half are likely to be disappointed.”

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