Thursday, China announced its economy grew an astounding 11.9% in the second quarter over the same period last year, well ahead of the consensus expectation for 11% growth. A number of economists bumped up their forecasts for this year and next.
The S&P/TSX composite index, which is closely connected to China's fortunes because of its broad exposure to commodity producers, took the news in stride. It ended the day at 14,625.76, up 0.3%. So, too, did the S&P 500 and most European indexes (curiously, China's Shanghai stock exchange composite index bucked the trend of the bullish day and ended down, but only 0.4%).
Just over a year ago, the story was very different -- or, at least, the reaction to the story was very different. Then, stock markets were convulsing over China's surprisingly strong economic growth and the seeming inability of authorities to engineer moderate growth, ideally to 8% from 10.2% in the first quarter. Investors and economists were divided into soft-landing and hard-landing camps, and the hard-landers were getting most of the attention. When China raised interest rates in April, 2006, by 0.27 percentage points (or 27 basis points), zinc and copper prices were sent careening on the worry that authorities would get too aggressive and kill the country's voracious appetite for these commodities.
"The initial fear was that Chinese policy might turn too abruptly," said Avery Shenfeld, senior economist at CIBC World Markets. "Now, with a number of quarters under our belt where China is attempting to apply some braking force, it is clear that they have been doing this fairly judiciously."
Qu Hongbin, China chief economist at HSBC, expects authorities will raise rates two more times but will not slam on the brakes given that inflation is still relatively contained.
Still, investors may be overlooking the fact that previous rate hikes are having little impact on the economy, where growth continues to accelerate at an uncomfortable pace. The latest quarter's growth was the fastest in 12 years in spite of the judicious rate tightening and well ahead of the 8% target, according to BMO Capital Markets. This should lead to concerns that China is once again showing signs of growing too fast, which would be bad news for investors -- and Canadian investors, in particular -- if it leads to an economic hard landing.
"Bottom line is that the Chinese economy is starting to overheat and more aggressive tightening measures that will have to include more meaningful currency appreciation are likely in store," said David Rosenberg, North American economist at Merrill Lynch, in a note to clients.
You would think investors would not take kindly to this sort of interpretation. But with the S&P/TSX composite index and the Dow Jones industrial average hitting new highs Thursday, investors may have filed China's problems somewhere between getting the kids into summer camp and refueling the barbecue.