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China growth slows
China growth slows

UPDATE 2.35pm China's latest economic data should be welcomed by Australian businesses, as the Asian giant appears to have reined in growth to a more sustainable pace.

China, Australia's number one trading partner, grew at an annual rate of 7.6 per cent in the year to June, its slowest pace in more than three years.

The expansion rate was 8.1 per cent as of March, according to China's National Bureau of Statistics.

“Some will be disappointed that economic growth fell short of lofty expectations near 9 per cent, but the actual outcome is far more positive from the context of sustainability,” Commonwealth Securities economist Savanth Sebastian said.

He believes China's self-induced slowdown to check inflation should be an encouraging sign for Australian business if it means growth is more sustainable.

The Chinese authorities have cut interest rates twice in the past month as price pressures become more contained.

Data released earlier this week showed China's annual inflation rate fell from three per cent to a 29-month low of 2.2 per cent in the year to June.

“(This) gives the Chinese authorities plenty of scope to provide further support for their economy,” HSBC Australia chief economist Paul Bloxham told ABC television.

Still, the Chinese bureau released reasonably solid numbers for retail sales, which grew at annual rate of 13.7 per cent, while urban fixed asset investments - such as roads and power plants - rose 20.4 per cent in the first six months of 2012 compared with a year earlier.

Mr Sebastian expects the slowdown in China, as well as in the United States, coupled with Europe's ongoing debt problems and Australia's own weak employment data yesterday, will firm the prospect of further interest rate cuts by the Reserve Bank of Australia.

The jobs figures, which saw the unemployment rate tick up again to 5.2 per cent, ended a run of reasonably upbeat data in the past couple of weeks for retail spending, home building approvals and consumer sentiment.

“We believe the RBA will cut rates in August to build on the recent improvement in confidence and activity,” Mr Sebastian said.

Financial markets are pricing around a 60 per cent chance of a cut in the cash rate to 3.25 per cent from 3.5 per cent at the August 7 board meeting, which will take into account what is expected to be a benign set of domestic inflation numbers of July 25.

Meanwhile, the ANZ opted to keep its home loan rates on hold after the central bank left the cash rate unchanged at its July board meeting.

After its monthly interest rate review meeting, ANZ chief executive Australia Philip Chronican said its decision was made despite the higher funding costs facing the bank.

Still, the ANZ needed to remain competitive.

“We know that many Australians are feeling uncertain about the global economy, and with household budgets under increased pressure this was another factor in our decision this month,” he said in a statement.

Australian and Asia region investors responded positively to the Chinese data. The Australian sharemarket, which was trading flat this morning, initially jumped more than 20 points on the news.

The benchmark S&P/ASX200 index eventually pared gains to close up just 14.2 points, or 0.3 per cent, at 4082.2.

Other indicators in the Chinese data, including strong June bank lending, which is closely tied to business activity, suggest the low point of the decline might be past, analysts said.

“The Chinese economy has already bottomed out in the first two quarters,” said Xiao Li, an economist at Industrial Bank in Shanghai.

The slump raises the threat of job losses and political tension. That comes at a politically difficult time for the ruling Communist Party, which is trying to enforce calm ahead of a planned once-a-decade handover of power to younger leaders.

The government is moving cautiously after its 2008 stimulus pushed up inflation and spurred a wasteful building boom. Authorities have said curbs imposed on building and home sales to cool surging housing prices will remain in place, even though pumping up the country’s slumping construction industry offers a quick way to boost growth.

Some parts of Beijing’s response to the slump threaten to set back efforts to reduce reliance on exports and government investment and to nurture more self-sustaining growth driven by domestic consumption.

Premier Wen Jiabao said this week that sustaining investment should be China’s priority, an acknowledgement that efforts to boost consumption are taking longer than expected to gain traction.

June retail sales growth declined to 12.1 per cent adjusted for price changes, down from the previous month’s 13.8 per cent growth, the National Bureau of
Statistics reported. Growth in factory output edged down to 9.5 per cent from May’s 9.6 per cent.

In a reflection of efforts to spur the economy with higher investment, growth in spending on factories, real estate and other fixed assets accelerated to 23.2 per cent in June, up from the previous month’s 20.1 per cent.

The first half “saw the bottom of the cycle and growth is set to rebound” later in the year, said Credit Agricole CIB economist Dariusz Kowalczyk in a report.

China’s relative strength compared with Western economies conceals severe pain in some segments of the economy. Retailers in some areas say monthly sales have fallen by as much as half and the Chinese shipbuilding industry association says orders in May were down by almost half.