Beyond China GDP — Other Indicators Point to Pickup for Economy

China’s GDP grew at its slowest pace in three years in the second quarter, but other less-cited indicators are already signaling that the world’s second-largest economy may be starting to turn around.

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The economy grew 7.6 percent in the April-June quarter, slower than the 8.1 percent in the first quarter and 8.9 percent in the fourth quarter of last year.

The slowdown has raised concerns around the world that one of the largest drivers of global growth in recent year and the world’s largest consumer of commodities such as oil and copper may suffer a sharper downturn.

Yet indicators that are now being more closely tracked by economists and hedge funds for a reading on the economy such as loan growth, power output, new investment projects and oil demand, while mixed, are painting a picture of strength ahead for China, economists tell CNBC.

According to Nomura’s Chief China Economist Zhiwei Zhang, among the 32 indicators he tracks, nearly two-thirds showed faster growth in May than April.

“Having a mix of negative and some positive data are typical at turning points in the economy, and indeed our conviction remains strong that the second quarter is the bottom of the economic downswing,” Zhang said. “There are also signs that the policy easinghas started to gain traction through the month of June.”

For example, the MNI China Business Sentiment, a private sector survey of businesses in 32 cities, showed an improvement in its final reading on June 29, compared to the flash estimate released two weeks earlier.

The final reading was 53.21 versus an initial reading of 51.92, which indicates that firms who responded in the final week were starting to be more positive, Zhang added.

At the same time, new bank loans in June rose 16 percent to 919.8 billion yuan ($144.3 billion) from May’s 793 billion yuan ($124.4 billion) and April’s 682 billion yuan ($107 billion), the People’s Bank of China said on Thursday, in a sign government efforts to spur the country's slowing economy may be working.

This means that the second quarter was as bad as it got, Zhang said. He’s forecasting that China will report 7.8 percent growth for the period, slightly higher than a consensus estimate of 7.6 percent in a Reuters poll. The economy will then rebound to 8.6 percent in the third quarter and 8.9 percent in the fourth quarter, translating to an expansion of 8.4 percent for the whole of 2012, Zhang said.

Power, Coal and Gasoline

Other indicators are showing an uptick in economic activity in China. Power output, an alternative gauge of industrial activity, rose in May, according to the latest available data from China Electricity Council. The country generated 389.8 billion kilowatt hours (kWh) of electricity in May, up 2.7 percent over the previous year. That compares to growth in electricity generation of just 0.7 percent in April.

China bears Andy Xie and Gordan Chang though read the electricity output numbers differently, pointing out that the growth is extremely weak and suggests further weakness.

But Alistair Thornton, China Economist at IHS Global Insight in Beijing says that after a dismal April, China’s economy has brightened up a touch. Things do look better, but primarily because they have not gotten worse.

However, he remains worried about another indicator, fast-building coal stockpiles, which he calls “one of the most worrying signs of economic weakness.” The main power-generating companies kept stocks sufficient for 28 day’s use as of early June, a record high for an industry which typically stores about two weeks of coal, he said.

“Stockpiles tend to track economic activity quite tightly— the slower the economy, the higher the stocks,” Thornton said. “This happened in 2008-09, and is happening again now.”

Stephen Green, Chief China Economist for Standard Chartered, said that while it is true that the industrial sector has weakened, the Chinese consumer remains resilient. Demand growth for gasoil and diesel has flattened off in the past six months, growing only at 2 percent year-on-year but gasoline production was holding steady at 8 percent year-on-year up to May, he said, suggesting that household consumption growth continues to hold up.

“Crude demand is telling us that yes, there’s a slowdown in the industrial sector but gasoline demand is still strong so it’s telling me that the consumer is still robust,” Green told CNBC. “I think we are in a structurally slower growth environment but it is stabilizing.”

He expects a moderate recovery in the second half of the year that will help the economy expand by 7 to 8 percent this year, thanks partly to China’s easing measures.

“If you look at the measures that the government is taking, normally it takes about 3 to 4 months before we start seeing signs of pick up,” Green said. “In this case, we can see that loan growth has started picking up, projects have started picking up, so yes, I think we can expect a turnaround in September."

- By CNBC's Jean Chua.