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Why China's May Numbers Are Bullish for the Economy

Sunday, 10 Jun 2012 | 10:34 PM ET

The latest set of data on China’s economy released over the weekend indicate that authorities’ easing measures are working, with economists pointing to strong internal demand and investments as signs the country is avoiding a sharp slowdown feared by many in the markets.

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Investors were spooked last week after China’s central bank cut interest rates for the first time since the global financial crisis in 2008, and analysts predicted China would report weakening growth in May.

Instead, China released data that was mixed. On the bearish side, industrial production in May was lower than expected. But Donna Kwok, HSBC’s Greater China economist, told CNBC’s “Asia Squawk Box” the numbers while weak on an annual basis, were actually up 9 percent over the previous month – a rather bullish sign.

Most economists focused on investments in assets such as infrastructure and real estate, a key component of growth and a closely-watched indicator because it was the second-biggest driver of China’s growth in the first quarter.

That number, called fixed asset investments, climbed 20.1 percent during the January to May period from a year ago, just above forecasts for a 20 percent rise.

Barclays economists pointed out in a note to clients that the investment numbers indicated the country’s stimulus measures are beginning to take effect. The economy is on track to bottom out in the second quarter, the bank’s economists said in a report on Sunday.

“Any quick growth stabilization needs to come from investment, i.e., it will depend on effective policy efforts to boost infrastructure and public-sector-led manufacturing investment,” Barclays said. “The May investment data confirm our expectations that year-on-year growth in both sectors has recovered or picked up.”

To boost slowing growth, China’s government has fast-tracked infrastructure spending such as investment in railways and energy projects. The central bank has also cut reserve ratios for banks in an effort to boost lending.

Another sign the economy was doing well, according to economists, was a jump in imports which rose more than expected in May, gaining 12.7 percent from a year earlier, exceeding expectations of a 5 percent increase in a Reuters poll, and above the 0.3 percent annual rise in April.

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HSBC’s Donna Kwok pointed to “a huge leap” in commodities imports as a bullish sign for the economy. “We are seeing initial signs of recovery in domestic demand in response to Beijing’s recent stimulus,” she said.

But some market observers point to a weakening global economy as a key risk that remains for the Chinese economy. Exports, which rose 15.3 percent, compared to a forecast of a 6.8 percent increase, may not be sustained.

“We’re not looking at a hard landing and that data is certainly a little bit comforting, but there’s no question, I think, that the economy in China is slowing probably more quickly than ever Beijing had anticipated,” Warren Gilman, CEO of CEF Holdings said.

The recent cuts in banks’ reserve requirement ratios and interest rates are helpful but they will not be able to “ultimately reboot the Chinese economy”, Gilman said. “I think the shoe has yet to drop."

—By CNBC’s Jean Chua.

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