China Economics:Signs of improvement need to be sustained through further easing

2Q GDP growth surprised on the upside on the back of broadbasedimprovement in June activity data, thanks to the rebound ininfrastructure investment, property sales and export growth. Weexpect policymakers to maintain their easing efforts in a bid tosustain the improvement in growth.

    2Q GDP YoY growth came in better than market expectations, flat at+7.0% YoY in 2Q (vs. consensus : +6.8% YoY; MS:+6.9% YoY). According toNBS, 2Q sequential GDP growth picked up to +1.7% YoY QoQ SA from 1.4%QoQ in 1Q. By sector, despite further deceleration in secondary industriesgrowth (+6.1% YoY in 1H vs. +6.4% YoY in 1Q), tertiary industries growthpicked up (+8.4% YoY in 2H vs. +7.9% YoY in 1Q).

    June industrial production (IP) YoY growth beat expectations, at +6.8%YoY in June (vs. +6.1% YoY in May), well above market consensus and ourforecast of +6.0% YoY. Despite a higher base from one year ago, theimprovement in IP growth was likely helped by one more working day in June2015 than in June 2014, and the faster sequential growth in June.

    YTD Fixed Asset Investment growth remained stable at +11.4% YTD YoYin June. The implied single month FAI growth rose to +11.4% YoY in June (vs+10.0% YoY in May), thanks to a notable improvement in infrastructureinvestment growth (+20.6% YoY vs. +15.1% YoY in May). Notably, SOE-ledinvestment growth picked up (+15.7% YoY vs. +9.1% YoY in May) whilePrivate (non-SOE) investment growth slowed to +9.3% YoY in June from+10.4% YoY in May.

    Nominal retail sales growth rose to +10.6% YoY from +10.1% YoY in May,beating consensus expectations of +10.2% YoY. Excluding the price factor, thereal growth of retail sales picked up to +10.6% YoY (vs. +10.2% YoY in May).

    This implies consumer spending remains resilient despite the recent equitymarket correction.

    Our Takeaway: The upside surprises in June activity data reflected: a) theimprovement in external demand; b) the initial impact of government easing,as reflected in the pick-up of infrastructure investment and SOE-ledinvestment, and c) the positive spillover from property sale rebound startingfrom April. While GDP growth likely bottomed in 1Q in sequential terms, theimprovement phase is finally arriving at a slower pace than we had expected.

    Overall funding conditions remain tight and private investment remainssubdued, posing downward pressures on growth.

    To sustain the improvement, we expect policymakers to maintain their easingefforts and deliver structural reforms. In addition to one more interest rate cutin 3Q, we expect more fiscal easing in 2H.