China’s GDP robust at 9.5% in 2Q11

Growth remained resilient in 2Q11: The NBS just announced 2Q11 GDP and the rest of the June macro data. Beating consensus forecast of 9.3%, 2Q GDP growth came at 9.5%yoy a tad slower than the 9.7% recorded in 1Q11. On a mom basis, sequential growth strengthened to 2.2%mom in 2Q vs. 2.1% in 1Q. Apart from FAI that saw mild moderation, IP and retail sales both came in stronger than expectations.

Implication to policy direction: This set of data should dispel concerns over a hard-landing in China. On the margin, it may raise concerns that a change in the monetary stance may not take place so quickly. Given that there were deteriorating growth trends from April to June, taking the full quarter data will understates pockets of stress within the Chinese economy. Based on our checks today, there is the possibility for a 25bps interest rate hike in August, but the chance for another RRR hike while there, is low.

Implication to China strategy: We reiterate our maximum bullish call on the Chinese equities as well as existing preference in upstream names over downstream sector. Over the past three trading days, the HSCEI has given up most of its gains since mid June on average trading volume. During our marketing meetings, some investors told us that they were waiting three things to happen before they would turn aggressive buyers of the MSCI - China equities: 1) elevated CPI print for June; 2) interest rate hike and 3) a potential earning downgrades. So far two out of the three have materialized. Based on our HK/China Access Conference, it does not appear that 1H11 earnings may surprise as much on the downside as feared.

On a 12 months forward looking view, we believe July is the best month to build long positions if one has not done so already in June.