Mini stimulus working its magic, China data shows

Women browse clothing at the International Finance Centre (IFC) mall in Hong Kong, China.
Brent Lewin | Bloomberg | Getty Images

A slew of data from China on Friday provided fresh signs that the economy is stabilizing, aided by targeted stimulus measures from Beijing.

May retail sales rose 12.5 percent on year, above analyst expectations for a 12.1 percent increase in a Reuters poll and their best performance since December.

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Industrial output meanwhile increased 8.8 percent on year in May, in line with market expectations, while fixed asset investment rose 17.2 percent on year for the January-to-May period, just above expectations for a 17.1 percent rise.

"It does look like we are getting a bounce in economic activity, helped by stimulus," said Bank of Singapore Chief Economist Richard Jerram. "The numbers are not earth shattering but they are reassuring given concerns about China's real estate market."

China's economy grew at annual pace of 7.4 percent in the first quarter, slowing from 7.7 percent in the final quarter of last year.

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Chinese authorities have rolled out a series of targeted economic measures over recent weeks, also referred to as a "mini stimulus," to support growth in the world's second-largest economy.

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Earlier this week, for instance, the level of reserves banks must hold with the central bank was cut for banks that have sizeable loans to the farming sector and small-and-medium sized firms.

"The economy is still growing below potential and there's not going to be a reacceleration any time soon, industrial prices are still weak and there's still a lot of spare capacity in many sectors," said Alistair Chan, an economist at Moody's Analytics.

"Still, growth is stabilizing and the data is a sign that the mini stimulus package is coming through and will put a floor under production," he added.

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Chinese shares were little changed following the data release, with the Shanghai Composite holding near two-month highs hit earlier in the day.

China's government is trying to rebalance the economy away from investment-led growth towards one driven by consumption and has shown a tolerance towards slower growth rates, economists say.

It has an official 2014 growth target of 7.5 percent.

"I don't think they [China's policymakers] should be obsessed with making the 7.5 percent growth target for this year," Paul Gruenwald, chief economist for Asia at Standard and Poor's Ratings Services told CNBC before the data release.

"If we come in a bit above 7 percent, and we get higher quality growth and the thing hangs together, then the banking sector holds together and we get sort of a better quality mix I think that's a good thing," he added.