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China's Larger Stimulus Program Appears to Be Working

Richard McGregor of the FT:

China GDP growth accelerates to 7.9%: China’s economy accelerated significantly in the second quarter, with gross domestic product expanding by 7.9 per cent, ahead of analysts’ consensus estimates. Li Xiaochao, a spokesman for the National Bureau of Statistics, said the economy “had stabilised with increasing positive changes”, as the new data were announced on Thursday. The surge in growth was driven by the government’s aggressively loose fiscal and monetary policies, introduced late last year, with most of the funding coming from record lending by state banks.

The economy grew by 6.1 per cent in the first quarter, leading many China economists to believe that the government would not be able to meet its year-long growth target of 8 per cent. But the government’s pump-priming has turned the economy around, prompting rapid revisions by many investment bank economists, and the World Bank, to upgrade China’s outlook. Mr Li said that fixed asset investment rose strongly, up 33.5 per cent in the first half of the year compared to the same period in 2008.

Inflation, the Chinese government’s biggest policy headache until the middle of last year, remained under control, with the consumer price index falling by 1.1 per cent in the first half of the year and 1.7 per cent in June alone. Many local economists believe that the central government will not begin to rein in the stimulus programme until inflation begins to pick up, or at least turns positive...