Stimulus package pays dividends as China's economy rebounds

BEIJING - China's economy rebounded from its weakest growth in almost a decade as record lending and surging investment countered a slump in exports.

Gross domestic product expanded 7.9 per cent in the second quarter from a year earlier after a 6.1 per cent gain in the previous three months, the statistics bureau said in Beijing yesterday.

China's 4 trillion yuan stimulus package and the scrapping of lending restrictions for banks triggered the revival in the world's third-largest economy. The nation risks bubbles in stocks and property after money supply grew by a record and inflows of cash pushed foreign-exchange reserves to more than US$2 trillion.

"China's recovery is on track and growth may accelerate to near 9 per cent in the third quarter and 10 per cent in the fourth quarter," said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. "The Government won't tighten policies too early but it should tell banks not to lend without limit."

The yuan yesterday traded at 6.8316 against the dollar. The Shanghai Composite Index of stocks rose 0.4 per cent.

The foundation of China's recovery is "not yet firm" after the economy stabilised in the first half and the Government will stick to its "moderately loose" monetary policy and "proactive" fiscal stance, statistics bureau spokesman Li Xiaochao said.

The central bank is using bill sales to drain cash from the financial system and push up money-market rates, seeking to tighten monetary policy without choking off a recovery.

One-year lending rates and banks' reserve requirements haven't changed this year after reductions in 2008 to counter the global crisis.

The Government may refrain from "drastic" policy shifts until a recovery is better established, Lu said.

The rebound in GDP snaps a two-year run of progressively slower growth. Investment in factories, property and roads surged 35.3 per cent in June from a year earlier, quicker than the 33.6 per cent pace for the first half as a whole, the statistics bureau said.

Shanghai's benchmark stock index has climbed almost 90 per cent from last year's low, with PetroChina and Industrial & Commercial Bank of China contributing the most.

- BLOOMBERG