Today China announced that Q2 economic growth came in at 7.5% year-on-year.
There are two possible responses to this announcement. Some will look forward to increasing demand for iron ore, coal, copper - generally speaking a return to the paradigm that has been in place for so long. Others will look back and cast a more critical view of this number. In a sense, both positions are right.
Those who care to look more closely will find it hard to verify such a strong result. The pillars of GDP growth are simply not there. Property sales and construction growth have slowed. International trade is still not back to full health. Domestic consumption is not at the levels that the government hoped for. But the Communist Party says it is achieving what it set out to achieve, so who are we to question the result.
And that is just the point. While Beijing has pinned its flag on the pinnacle of 7.5% growth, most likely before it arrived there, meantime, credit supply and money growth are quietly being primed for the sprint to the finish line. M2 money supply rose to 14.7% y-o-y from 13.4%, while new total social financing (TSF) also rose strongly to RMB1.97trn in June from RMB1.40trn.
In other words, we probably will see increased activity in infrastructure and housing and other investment-led economic activity in the second half of this year, and we almost certainly will see that China achieves its target of 7.5% growth in 2014. Iron ore, coal, copper and aluminium will all gain from the renewed optimism outside and inside China as a result of announcing this Q2 score.
But it was Heisenberg that said that the more you measure a phenomenon, the less you can measure its velocity. In other words, you can measure one but not the other at any given observation. Which leads me to suggest to Beijing that they stop talking about 7.5%, and stop predicting it, because it’s more important to be travelling at that speed than to chalk up the correct score.
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