China’s second quarter GDP numbers, released yesterday were widely reported in the Australian press as further evidence that the global economy has turned the corner, and it’s all up from here. Hopefully that is correct, but as always, reading China’s GDP numbers is as much art as science.

The headline number is GDP growth over the year to the end of the June quarter of 7.9%, up from 6.1% growth in the first quarter. China’s GDP growth slowed dramatically in the last couple of months of 2008 and into the first quarter of this year, but is now showing signs of picking up very quickly in the second quarter. The major reason for the pick up is the effectiveness of China’s stimulus package. Most major Chinese cities have detailed plans for their cities out to 2030 or beyond – these plans include great detail on public transport and road requirements. With these plans in place it is possible for provincial and local governments to speed up spending programs if funds are provided to do so.

The willingness of China’s central government to expand monetary policy has enabled banks to lend to state owned enterprises, and so China’s stimulus package has very quickly led to huge spending on public infrastructure. Fixed investment grew by over 40% in real terms over the past year, mostly representing this huge increase in infrastructure spend. Interestingly, this increase in spending has not been strongest in the usual growth engines in China such as Shanghai, Beijing, and the export oriented areas around Guangdong province. Instead, second tier cities and provinces away from the coast are expected to grow quicker than average throughout 2009 – particularly in Sichuan province where earthquake reconstruction continues, but also in places like Inner Mongolia.

China currently has around 130 million workers in the urban centres who have migrated from the countryside. It is commonly claimed that China needs 8% GDP growth to create enough new jobs to support these migrant workers, as well as to create jobs for additional migrant workers as they move to cities. If growth falls too far below 8% then rising urban joblessness will create social unrest and put pressure on the central government to support the economy.

This pressure is one of the reasons why the central government has been willing to support the stimulus program in China. Moving forward however, China needs to move towards an economy that is driven more by private investment and by consumption, rather than by investment that is state driven. Encouragingly, retail sales grew by nearly 17% in the past year, but this stronger growth in consumption needs to continue. For China’s economy to have sustainable growth in the medium to long term, China’s reliance on investment by state owned enterprises needs to be reduced. But in the short term the Chinese government will continue to support growth through loose monetary policy and heavy funding to state owned enterprises for infrastructure and related projects. With this being the case I think that we can expect to see China’s economy grow at around 8% in 2009 and in 2010.

The implications for Australia of this growth are very positive. Not only is China growing reasonably strongly, but the emphasis on infrastructure makes this growth very resource intensive, which of course is a good thing for Australia’s resource exporters and for our economy.