Analysis & Opinion

BEIJING (Reuters) — China’s economy grew 7.6 percent in the second quarter of 2012 from a year earlier, its slowest pace in three years, confirming expectations of a downward trajectory that leaves full-year growth on course for its softest showing since 1999.

The GDP number released on Friday, which was in line with a Reuters poll, marked the sixth straight quarter of easing growth and left analysts combing a raft of accompanying data to assess whether the second quarter marks the bottom — or an extension — of the downward cycle.

The trajectory of the economy is crucial for investors facing a slowdown not only in China, the world’s second-largest economy, but anemic growth across the BRIC grouping of major emerging economies — Brazil, Russia, India and China — which combine as the biggest marginal generators of global growth.

Overall, this is a soft landing, but we can see that the Chinese economy is undergoing serious pain, said Xianfang Ren, an economist at IHS Global Insight in Beijing.

I have 80 percent confidence that the economy will pick up in the third quarter as we have been in a slowdown for six consecutive quarters now. However, if the economy does not show an upturn in the next few months, factories will probably have to lay off workers and that will hit employment.

Other data released alongside GDP revealed fixed asset investment growth was 20.4 percent in the year to June versus the 20.1 percent forecast in the benchmark Reuters poll.

Fixed asset investment has been the key driver of economic expansion in China for a decade and is a major risk factor for investors watching its rate of growth ease back from 25 percent plus to around 20 percent on average so far this year — especially as the government’s stated aim is to reduce its contribution to growth as it rebalances the economy.

Retail sales in June were up 13.7 percent on a year ago versus May’s 13.8 percent and industrial output was weaker than expected, growing 9.5 percent versus expectations of 9.8 percent, while power output was flat.

Asian share prices and emerging Asian currencies firmed modestly after the data.

MONETARY EASING

Inflation and trade data earlier this week showing fast-easing consumer prices, outright deflation in producer prices and import growth at less than half the rate expected in June sent a bearish shiver through financial markets.

Two interest rate cuts in the space of a month, accompanied by liberalization moves allowing banks to discount borrowing costs by a further 30 percent, had already fuelled investors’ fears that China’s economy may be slowing more sharply than expected — jeopardizing even Beijing’s official full year GDP growth target of 7.5 percent.

The moves have been taken as a sign by some analysts that the government will do everything possible to underwrite growth ahead of a once-a-decade leadership transition that gets under way in the autumn.

Beijing has also cut the amount of cash banks are required to hold as reserves — known as the reserve requirement ratio or RRR — three times since November, and twice in four weeks this year, to bolster the economy.

But it has refrained from pumping out another stimulus package similar to the 4-trillion-yuan splurge launched during the global financial crisis.

The measures have left some economists hopeful that growth will pick up in the third quarter as Beijing further loosens monetary policy.

Slowing domestic consumption has dragged on China’s economy. But we think the economy hit a bottom in the second quarter, said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai.

We expect China will have one more interest rate cut and two more RRR cuts in the second-half of this year.

Companies on at least three continents have blamed slowing Chinese growth for their worsening performance.

This week alone, British fashion brand Burberry ( BRBY.L ) reported a decline in its China sales growth, U.S. chipmaker Advanced Micro Devices AMD.N warned of disappointing Q2 revenue because of softer than expected sales in China and Europe and China Southern Airlines ( 1055.HK ) said its H1 net profit would likely fall in part on slower domestic growth.

China’s automobile sales growth lost further momentum in the first half, figures on Thursday showed, as the country’s slowing economy sapped consumer sentiment, with potential buyers even resisting big discounts and promotions from automakers such as Ford and Toyota.

Economists remain divided about when China’s economy will reach the bottom of its current cycle, with many preparing to take the scalpel to full-year forecasts which, according to the last Reuters consensus poll in April, call 2012 growth at 8.4 percent.

The Asian Development Bank cut its full-year China growth expectations for 2012 to 8.2 percent in new forecasts published on Thursday, down from the 8.5 percent they had estimated in April.

(Reporting by China Economics Team; Editing by Alex Richardson )