China GDP: Did PBoC jump the gun with rate cuts?

In the second quarter, China’s GDP grew at the slowest pace in the last three years, but still met expectations. The number came in at 7.6%, confirming expectations of a downward trajectory that leaves full-year growth on course for its softest showing since 1999.

China’s PBoC undertook two interest rate cuts in the space of a month, accompanied by liberalisation moves allowing banks to discount borrowing costs by a further 30%, had already fuelled investors' fears that the economy may be slowing more sharply than expected - jeopardising Beijing's official full year GDP growth target of 7.5%.
In an interview to CNBC-TV18, Mark Williams, chief Asia economist, Capital Economics talks about how he sees the Chinese economy shaping up for the rest of this year. Below is an edited transcript of his interview. Q: What do you made of today’s GDP data?
A: The second quarter growth figure was pretty much in-line with market expectations. That has already been priced in. Perhaps, the more interesting numbers that came out today were the numbers for June spending and activity, numbers such as the retail sales, industrial production and investment numbers.
They all seemed to suggest that, although Q2 was weak, June was a little bit stronger or at least it didn’t continue to weaken throughout Q2. So that’s the reason to believe that maybe conditions are stabilising, perhaps they are even improving a little bit and we could see a slightly stronger growth in the second half of the year. Q: The bank lending number has exceeded the forecast even though you expected that a weak number is what probably prompted the PBOC towards that second rate cut. We have the number come in at RMB 920 billion between forecasts of RMB 880 billion to RMB 900 billion. What does that lending number tell you?
A: That is certainly the most important development that we have seen this week. The PBoC just over a week ago cut interest rates which suggest that at that point they were worried about the pace of credit growth and this turns out to be true that the lending by the big banks was very weak last month, but there was a slew of lending by smaller banks, which more than made up for that.
So overall lending increased relative to the month before. In other words, even before the PBoC loosened policy further, the previous moves were starting to have an impact and as lending picks up that fairly will feed into stronger investment activity over the next few months.
Looking ahead now we have had another rate cut, we have had lot more guidance from senior politicians, and they want to see more investment as well, we are going to see a pretty sizeable turnaround in activity over the next few months.
The big question perhaps is how long this is going to go on for? The government has always had in mind that there is a leadership transition happening towards the end of this year and the beginning of next year and it didn’t want the economy to look too weak at that point. I think it’s done enough now to probably secure itself a stronger accelerating pace of growth when the handover happens. Watch the accompanying video for the complete interview...