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China GDP didn't miss, so why aren't markets rallying?

Monday, 15 Jul 2013 | 1:28 AM ET
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China's highly anticipated second quarter gross domestic product (GDP) data allayed some fears over a sharp growth deceleration in the world's second largest economy, yet cheer was limited in Asian markets on Monday.

While the Shanghai Composite rose 1.5 percent, making it the standout outperformer, Australia's S&P/ASX 200 and Hong Kong's Hang Seng Index reacted with caution, rising just 0.2 percent and 0.4 percent, respectively. The MSCI Asia Pacific ex-Japan, meantime, traded up 0.2 percent.

(Read More: What China's battered stock market is telling us)

The Australian dollar, seen as a proxy for Chinese growth, rose to as high as $0.9109, but pared back gains to trade around $0.9092 in the afternoon trading session.

"The data will do little to alleviate concerns that the Chinese economic outlook is vulnerable," Greg Gibbs senior FX strategist at RBS wrote in a note following the data.

"The rise in second quarter growth from the first quarter is very small and on this trajectory, annual growth may get to 7 percent, but would struggle to get to 7.5 percent, unless there is a surprising rebound in the third quarter," Gibbs said.

China's economy grew an annual 7.5 percent in the second quarter of the year, in line with market expectations, but down from 7.7 percent in the first three months of the year. On a quarter on quarter basis growth was much slower at 1.7 percent, against a Reuters forecast of 1.8 percent.

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

Other data released alongside the GDP numbers showed June industrial output rose 8.9 percent from a year earlier, below expectations for a 9.1 percent increase. June retail sales, however, rose 13.3 percent from a year earlier, versus expectations for a 12.9 percent rise.

What China's latest GDP data means for Asia
George Boubouras, CIO, Equity Trustees explains what China's second-quarter GDP data means for the rest of Asian markets.

Reflecting uncertainty prevalent in the markets, Stephen Green, China economist at Standard Chartered Bank said, "There's a serious amount of confusion, lack of clarity about what happens next."

"There's a lot of downward pressure on the economy, we know there's some bad debt in the banking system, we know that the corporate sector is pretty leveraged up, we know exports aren't doing that well, we know the government's not going to stimulate, those are the downside risks," Green added.

On Friday, China's finance minister Lou Jiwei, raised concerns over the country's growth outlook. He was quoted as saying by the official Xinhua news agency that 7 percent growth should not be considered as the bottom line, and that while the economy was slowing there would not be a hard landing.

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

Xinhua, however, issued a revised report saying there is no doubt China can achieve this year's growth target of 7.5 percent.

Audrey Goh, investment strategist at Standard Chartered added that investors are also cautious because there is a lack of clarity over policymaker's pain threshold when it comes to growth.

Markets turn to the Fed

With the long-awaited China's growth numbers now behind us, strategists say the focus will shift to Federal Reserve Chairman Ben Bernanke's testimony on the economy to a House panel on Wednesday and a Senate committee on Thursday.

(Read More: Global markets sigh in relief on Bernanke comments)

"China's GDP has become a non-event because it came in line with expectations, which is why markets are stable right now. For the time being, the expectations for worsening growth are no longer there. Markets will now look forwards the Fed," said Kelly Teo market strategist at IG Markets.

—By CNBC's Ansuya Harjani

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