China GDP, Economic Data Beat Expectations

China’s economy expanded faster-than-expected in the second quarter, setting the country on course to comfortably meet its 2017 growth target and giving policymakers room to tackle big economic challenges ahead of key leadership changes later this year.

The boost to growth was in part driven by firmer exports and production, in particular steel, which could heighten trade tensions as both the United States and China begin economic talks this week. US President Donald Trump has made the US trade deficit with China a top agenda item in bilateral talks and has also flagged the steel trade as a point of contention, Reuters reported.

China’s gross domestic product rose 6.9% in the second quarter from a year earlier, the same rate as the first quarter, the National Bureau of Statistics said on Monday. That was higher than analysts expectations for the economy to expand 6.8%.

Economic data from the second quarter has prompted a number of analysts to upgrade their GDP forecasts for China for 2017, although some moderation in growth is expected later this year as policymakers’ efforts to rein in property and debt risks weigh on activity.

“In general, we expect GDP growth to remain robust in the second half but slower than the first half, due to the high base,” Citi economists said in a research note. “Looking ahead, uncertainty remains on investment and trade.” The bank has raised its 2017 annual GDP projection to 6.8% on-year from 6.6% previously.

The robust data briefly helped China’s major stock indexes recoup earlier losses, before retreating later in the session. The second quarter numbers put the economy on a strong footing to meet China’s growth target of around 6.5% in 2017, which would give policymakers room to defuse financial risks.

While growth in the high-flying property sector has cooled this year, a rebound in exports after several years of decline has helped prevent any broader slowdown in China’s economy.

Retail spending and factory output were also bright spots in the first half. Retail sales growth picked up to 10.8% in the second quarter from 10% in the first quarter, a Reuters calculation based on official data showed.

Factory output also picked up in the second quarter, though the 6.9% growth for the first half was only a slight pickup from recent quarters.

With two quarters of GDP expansion at 6.9% against a lower full-year target, the Chinese government will now have greater tolerance of slower growth in the second half of the year, said Aidan Yao, emerging Asia economist at AXA Investment Managers.

Stability Agenda

The improving economy is no doubt welcome news ahead of a reshuffle of the top ranks of government at an autumn congress of the ruling Communist Party of China, with leadership keen to ensure a smooth run-up to the meetings.

President Xi Jingping is widely expected to tighten his grip on power at the party congress, which could give him more clout to push through what analysts say are long overdue but painful reforms such as restructuring massive state firm debt. Xi said on the weekend he wanted to give China’s central bank a bigger role in dealing with risks in the financial system.

The stronger growth also means officials will have more room to address the growing debt problem, as China continues to place controlling risk and deleveraging at the forefront of financial policy this year.

National Bureau of Statistics spokesman Xing Zhihong on Monday also hinted at further progress in rebalancing the economy this year, saying “positive changes in the economy will increase, with the trend of stable and improving development consolidating and expanding further.”

With China and the United States set to begin economic talks on Wednesday, simmering trade tensions are sure to be a major topic and firm Chinese export numbers will certainly keep the point of contention elevated.

The surplus with the United States was $25.4 billion in June, up from $22.0 billion in May, official data showed last week, and its widest since October 2015, according to a Reuters calculation.