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China's economy slows for second straight quarter

Stringer | AFP | Getty Images

China's economic growth in the second quarter of the year may not have slowed as much as some had feared, but a large degree of uncertainty about the outlook for the world's second biggest economy remains, strategists say.

Data on Monday showed the Chinese economy grew 7.5 percent year on year in the June quarter, in line with expectations, but down from 7.7 percent in first three months of the year to mark the second straight quarter of slowing growth.

"Who knows if 7.5 percent [growth] is sustainable? It really is a question of watching the data and where it stabilizes is what's important for the market," Simon Warner, head of macro markets at AMP Capital, told CNBC Asia's "Cash Flow."

(Read More: Just how low will China allow growth to go?)

"We have a real situation in China where nobody really knows where Chinese growth is going to settle down in the coming quarters," he added.

The China gross domestic product (GDP) data bought some relief to markets, which had braced for a weaker-than-forecast number after recent data sparked fears of a sharp slowdown in growth.

Asian stock markets were a touch firmer after the GDP release, while the China-data sensitive Australian dollar hit a session high of about $0.9109.

(Read More: Why aren't markets rallying over China's GDP?)

In a statement, the China statistics bureau said economic performance in the first half was stable, with economic indicators within a reasonable range.

Other data released at the same time as the second-quarter GDP numbers showed June industrial output rose 8.9 percent from a year earlier, below analyst expectations in a Reuters' poll for a 9.1 percent increase.

June retail sales rose 13.3 percent from a year earlier, versus expectations for a 12.9 percent rise.

This was a contrast to data last week showing Chinese exports fell 3.1 percent in June from a year ago, marking the first decline since January 2012.

(Read More: Why China delivered such a big miss in trade data)

"We know there's bad debt, we know exports are not doing very well, we know the government is not going to stimulate. Those are risks, but there also positives: retail sales and housing consumption seem to be pretty solid and the housing market is recovering in the top 50 cities," Standard Chartered Bank's senior economist Stephen Green told CNBC.

"So there are all these different pressures and we don't really know what will happen next. There is a serious amount of confusion and lack of clarity about what comes next," Green added.

China's full-year growth was 7.8 percent in 2012 and the government targets growth of 7.5 percent for 2013, which would be the slowest in 23 years, according to Reuters.

Analysts at Nomura said that while they maintained their 2013 GDP forecast of 7.5 percent, they had lowered their 2014 forecast to 6.9 percent from 7.5 percent after Monday's GDP report — partly on an expectation that China's government would lower its official growth forecast for next year.

Lack of clarity

"In the U.S. we can't predict what's going to happen in three months' time and here we have folks saying growth will be 7.5 percent," said Bill Smead, CEO at Smead Capital Management. "And that's fantastic but I'd like to take them [policymakers] into some other arena so I could make some money out of their ability to predict things so exactly."

So far Chinese policymakers appear happy to allow a lower level of GDP growth as the economy shifts away from a dependence on investment and exports.

"We see Chinese growth slowing to just 6 percent in five years time and 4-5 percent the end of the current decade," analysts at Societe Generale said in a note.

Last week, the International Monetary Fund (IMF) highlighted slowing Chinese growth as one of the three main threats to global economic growth.

Some economists pointed to the indicators that Premier Li Keqiang is believed to follow closely such as power consumption and railway freight that have showed some signs of stabilizing from sharp falls.

"Proxy data appears solid," said Standard Chartered's Green. "Electricity consumption is running around 6 percent, rail freight is negative but road freight is running about 6-7 percent."

Louis Kuijs, China economist at Royal Bank of Scotland, maintained his forecast for full-year growth of 7.5 percent.

"There are downside risks to this, notably from the global side and the possible impact of lower credit growth. In our view the downside risks have not worsened materially because of the Q2 data and we keep our forecast unchanged," he said in a note.

— By CNBC.Com's Dhara Ranasinghe; follow her on Twitter @DharaCNBC

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