Here's why China's rebound is insignificant

2012 GDP forecast was lowered to 8% as stronger headwinds from external demand and delay in policy easing intensify.

According to Morgan Stanley, evidence of a forceful rebound is too limited. The newly released July data confirmed that domestic demand growth has stabilized at a low level with the help of moderate policy easing. The data showed a reverse in some of the emerging signs of a growth rebound indicated by data from the previous month, and suggested a sharp deterioration in external demand. Compared to our previous expectation, the evidence of a forceful rebound is too limited at a time when we predicted it should be in full swing.

Here's more from Morgan Stanley:

We lowered our GDP forecasts to 8.0% and 8.6% for 2012 and 2013, respectively, down from 8.5% and 9.0%. We cite stronger headwinds from external demand and the delay in policy easing intensification in China. We expect a wave of forecast revisions to be forthcoming and think that our new numbers will likely remain within the upper end of the market expectation spectrum.

But lack of major downside surprises precludes any aggressive moves: Though activity growth indicators showed broad-based weakness in aggregate demand, none of the activity indicators – industrial production, retail sales or fixed asset investment growth –delivered any major downside surprise that may trigger a more aggressive policy move immediately. The deterioration in export growth was sharp and broad-based.

The well-anticipated policy easing is slow in delivery. Despite the two interest rate cuts in June and July, we have yet to see sufficient evidence that policy easing has intensified. The late start of fiscal expenditure acceleration, local government bond issuance, and the still low share of medium-to long-term loans in total newly increased corporate loans all point to a delay in the policy easing we have been calling for in the last two quarters. In addition, the central government insisted on strict reinforcement of property policy tightening measures, in contrast to our expectation of a de facto relaxation by now. The aim has been to prevent property prices from going up in the near term.

Growth rebound to come, but later and smaller in scale than we thought. With the help of more effective fiscal policy easing measures adopted starting in July, we expect growth to rebound towards its long-term potential level of 8.5% in the next six to nine months. This should become increasingly likely as political uncertainties dissipate and headwinds from external demand strengthen, although the rebound may be slightly later and smaller in scale than we previously expected.