China's remarkable GDP report was all about one thing

China reported an impressive second quarter on Wednesday. The June quarter gross domestic product (GDP) came in at 7%, beating the median forecast for 6.9%.

While the Chinese economy has been decelerating in recent years, it’s not too hard to see why China’s most recent quarter was hotter than expected.

Bloomberg’s chief Asia economist Tom Orlik points out that the recent boom in the Chinese stock market boosted the financial sector, and caused it to grow at more than twice the growth rate of the whole economy.

The sector may have added a whopping 0.5 percentage point to the GDP print, according to Orlik.

“The good news is that helped offset weakness elsewhere in the economy,” Orlik wrote in a note Wednesday. “Real estate managed an expansion of just 3.3 per cent and transport and logistics grew just 4.9 per cent. The bad news is that, with the increase in financial sector output tied to surging equity market valuations and turnover, it will be tough to sustain in the face of the market correction.”

Year-to-date, the Shanghai Composite Index is up 18%, despite a correction that started mid-June and plunged the market by 30% in about one month. 

A growing financial sector creates more job opportunities, and so that’s a plus.

But, with such a fragile economy and stock market, China cannot depend on its financial sector to prop its growth numbers so that they continue hitting the 7% target. 

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