China reported below-forecast growth in factory output and investment today, underlining why senior officials keep reminding markets that recovery in the  world’s third-largest economy is not yet on solid ground.

On the bright side, retail sales rose a surprisingly strong 15.2% in the year to July, showing that domestic consumption is helping to make up for a collapse in export demand, which has been a big growth driver in recent years.

Industrial output increased 10.8% in the year to July, a nine-month high and above June’s 10.7% reading but below forecasts of 11.7% growth, the National Bureau of Statistics said.

Beijing’s 8% growth goal looked fancifully ambitious in the depths of the global slump. China’s economy slowed to a crawl in the final months of 2008 and the first quarter of this year. Now, thanks to a massive 4 trillion yuan ($585 billion) stimulus package concentrated on  infrastructure and a record burst of lending in the first half by China’s mainly state-owned banks, it will be a surprise if the 8% percent goal is not hit.

Year-on-year the economy expanded 7.9% in the second quarter. Compared with the first three months, the growth rate was an annualised 14.9%, according to the central bank.

Given the rapid recovery, financial markets have started to ask when the authorities will start tugging on the policy reins to avert the risk of asset price bubbles. The Shanghai stock market is up nearly 80% this year.

Sources: Reuters: BBC: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia: GaveKal:

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