Is China Growing Modestly Amid Dim Global Forecasts?

China is well on the path to recovery as policy stimulus measures kick in, economists say.

China's slowdown might be real, but its economy is far from smashing into smithereens. Many subtle pointers indicate that the world's second-largest economy is turning around. There is now a growing optimism among economists and investors in China's ability to fend off the doom of a global downturn.

Economic growth could have slowed down to 7.7 percent in the second quarter, from a year before, according to a median estimate of 36 economists in a Bloomberg News survey.

The Chinese government's move to a stimulative policy, while initially creating ripples of concern in global markets, is grooming China for a recovery by the end of this year.

After burning its fingers with the inflationary effects of a staggeringly high annual growth rate of 10 percent, China is now eyeing a more modest pace of growth ranging between 8 percent and 10 percent a year, according to Barry Bosworth, an expert on China and an economist at The Brookings Institution.

Unlike many countries, China has a lot of room to act, Bosworth said. Fears of a major slowdown in China are exaggerated.

China has seen an improvement in its trade balances as an offshoot of declining import bills in the wake of falling global oil prices. Its exports have also been rebounding, following a decline in orders resulting from a slump in global export markets. Exports grew 9.2 percent in the first half of 2012, from the year-earlier period. Export profits could have been higher if sales to the European Union hadn't slipped 0.8 percent during this time. Imports rose 6.7 percent.

A need to improve these readings prompted policy support from the government. Current efforts to ease credit flow in the economy initially alarmed investors and economists. Markets reacted strongly to the cuts in benchmark deposit and lending rates, introduced by China's Central Bank in early July -- an endeavor that was perceived as a signal that the slowdown in China was far more serious than imagined.

I don't think that's true, Bosworth said. The government has responded appropriately with the rate cuts.

Last year, China imposed pricing caps on new homes, introduced property taxes and put new lending regulations in place for home buyers and developers to mitigate the impact of a bubble in the domestic housing market and stem the rise in real estate prices. However, the anti-inflationary measure had a telling effect on the economy. The credit-tightening measures came at a time of declining exports and falling global oil prices. It is now hoped that the stimulus gains will drive a steady rebound in the third quarter of this year.

Another source of concern is the accuracy of China's economic data. China's provincial governments have many incentives to overstate figures in the reports they aggregate and post with the central government. However, the central government is factoring in that possibility and making adjustments in their final economic readings, some market analysts say. That leaves room for no more than a small amount of exaggeration in China's economic data, if any.

Furthermore, the country operates with the usual battery of market-based tools that are found in other countries -- yield curves, stock prices, purchasing manager surveys and indices created by the Organization of Economic Cooperation and Development, or OECD, to measure variables like employment and economic activity -- indicators that do not provide leading information about where the economy is heading.

Some economists say that credit growth is the best indicator of how the country is faring as such a yardstick offers an accurate picture of whether business investments are rising or waning. Real estate prices are a primary marker of investment flows in the country.

The Chinese government is not known to provide details about the country's quarterly estimates either. Government officials are however trying to revamp their outdated Soviet-style statistical reporting processes from a Material Product System by creating a framework that matches the international accounting system of Standard National Accounts, a global benchmark established by the United Nations in 1953.

The Chinese government has been working closely with the World Bank, which has extended its support to ongoing efforts to improve the country's statistical system.

The rising optimism comes just a day before China is due to report its second-quarter growth rate. A Reuters poll of 21 analysts, conducted in May this year, gave a median forecast of 7.6 percent as the rate at which the economy would expand in the second quarter, compared to a year before. This projection means that China would grow at its slowest pace in three years.

It's a good idea for them to have a modest growth at the moment, Bosworth said.