HSBC raises China GDP growth forecast

Banking giant HSBC has upgraded its forecast for China's year-on-year gross domestic product (GDP) growth to 7.5 percent from 7.4 percent, saying recovery has been stronger than expected.

The Chinese economy expanded 7.5 percent year on year and 2 percent quarter to quarter (seasonally adjusted) in the second quarter. In the first half of 2014, China's economy expanded 7.4 percent from a year earlier.

GDP growth in the second quarter "surprised on the upside relative to our forecast" owing to stronger-than-expected government support measures, HSBC Chief China Economist Qu Hongbin said in a report on Monday.

Activity data suggests that most of the improvement came in June, with monthly fixed asset investment and industrial production growing 17.9 percent and 9.2 percent, respectively, compared with 16.9 percent and 8.8 percent in May.

Policy support has been instrumental in helping China's economy recover more quickly and strongly than expected. Bank lending picked up greatly in June, and fiscal spending accelerated in May and June. As a result, infrastructure investment and related manufacturing investment accelerated.

Government policies, particularly fiscal policy, will likely be even more supportive in the second half as it is traditionally the spending season, Qu said. "We expect the cumulative impact of easing measures to continue filtering through and policymakers to maintain their accommodative stance."

Despite revision of the 2014 GDP forecast, Qu said HSBC's broad outlook on the Chinese economy remains unchanged.

In the near term, infrastructure investment will remain the policy of choice when it comes to supporting growth. Continued reform measures to expand the municipal bond market, regulate shadow bank lending and restructure state-owned enterprises will help reduce funding risks. Both monetary and fiscal policy will remain accommodative to consolidate the recovery, according to the report.

The main downside risk to HSBC's forecast for China remains the property sector. Although the contraction in sales eased in June, funding and investment growth remained depressed.

However, Chinese policymakers can offset the negative impact given that they have a broad range of policy tools at their disposal, Qu said.