Markets rally as China data allays fears

The world's second largest economy expanded at 7.6 per cent in the June quarter, down from 8.1 per cent in the previous quarter, due to declining activity in the country's two main growth engines, its export and construction industries.

The weaker numbers fell within market expectations - economists surveyed by Bloomberg had tipped a growth rate of 7.7 per cent - but was met with relief by investors who had feared an even bigger slowdown in China would augur badly for bulk commodities like iron ore and coal.

Reaction to the news was strong and immediate on the Australian market, with the benchmark ASX 200 index surging nearly 30 points within minutes of the data being released. Mining stocks in particular were well supported by investors.

Mirroring the broader market's rise, shares in BHP Billiton and Rio Tinto rose by almost 1 per cent within minutes of the data being released. While not all those gains were maintained, both finished the day better off as a result of the data.

Similar instant rises were evident for Atlas Iron, Fortescue Metals Group, copper play Sandfire Resources and most other miners. The ASX 200 closed 14 points, or 0.4 per cent, higher at 4082.2 yesterday, snapping six days of falls.

Activity in construction industry declined by 6.9 per cent as a result of the continuing tight control of the once-booming real estate sector by the Chinese government. Compared to the same period last year, the sector slowed by as much as 16.3 per cent.

HSBC's chief economist for Australia, Paul Bloxham, said the figures were reasonably positive and supported his view that the Chinese economy appeared to be on track for a soft landing.

"Fixed-asset investment numbers in the Chinese GDP figure held up rather well and they were up 20 per cent over the year and I think it is still a reasonably positive sign for commodity producers," he said.

The weak figures prompted ANZ Bank to lower its annual growth forecast for China's economy from 8.6 per cent to 8.2 per cent.

"The second quarter GDP growth suggests that China's slowdown was more severe than expected," ANZ China's chief economist, Liu Li-gang, said. "While we think a rebound is under way, the cyclical rebound will be a moderate one because of the lack of policy conviction and the still uncertain global outlook."

Dr Liu warned that if Beijing did not loosen its tight rein on the real estate sector, it will risk further sharp slowdown in the economy in the second half of the year.

But there are no signs yet that Beijing will do so. The Premier, Wen Jiabao, said last week that the government would not waver from its commitment to drive house prices to a more socially acceptable level.