China's growth slows in 2012

Beijing - China's economy grew at its slowest pace in 13 years in 2012, though a year-end spurt supported by infrastructure spending and a jump in trade signalled the foundation for the stable growth path Beijing says is vital for economic reform may be in sight. 

Evidence of a burgeoning recovery in exports, stronger than expected industrial output and retail sales, together with robust fixed asset investment, all indicated that Beijing's pro-growth policy mix has gained sufficient traction to underpin a revival without yet igniting inflationary risks. 

Year-on-year growth of 7.9% in the fourth quarter beat a consensus forecast of 7.8% in a Reuters poll and snapped a streak of seven consecutive quarters of slowdown. 

The performance was at the upper end of the 7%-8% rate economists reckon is needed to deliver on reforms essential to China's long-term development after three decades of red-hot, double-digit growth. 

Full year growth of 7.8% was also just ahead of the poll's 7.7% call and, although the weakest since 1999, comfortably ahead of the government's 7.5% target, which just months ago seemed to some economists to be in jeopardy. 

"It's kind of like a golden spot - stronger growth, but not strong enough to trigger a lot more inflationary concern. That's perfect for equity markets." said Dariusz Kowalczyk, Asia ex-Japan senior economist and strategist at Credit Agricole CIB in Hong Kong.

"What everybody wants is growth that's strong enough to give us peace of mind that revenues will increase and there is no hard landing risk, but not excessive, not strong enough to trigger inflation. And this is what I think we are getting. I'm bullish on China still." 

Market reaction was generally upbeat, with Asian shares advancing and platinum and palladium following suit, while oil traders took the opportunity of data confirming the recovery to book profits after two sessions of steep rises. 

China's new leaders must stabilise the economy this year to keep employment high while avoiding a surge in housing prices and inflation that could undermine reforms needed to overhaul the country's export-oriented growth model. 

Without stability, incoming President Xi Jinping and Premier Li Keqiang, who are set to be confirmed in March, have no chance of delivering a slew of reforms they say are needed to tackle a host of financial, industrial and income imbalances that threaten China's future. 

Addressing the wealth gap 

China's Gini coefficient stood at 0.474 in 2012, down from 0.477 in 2011 and from a peak of 0.491 in 2008, Ma Jiantang, the head of the National Bureau of Statistics, told reporters at a press conference on 2012 economic performance.

The index ranges from 0 to 1, with the 0.4 mark viewed by analysts as the point at which social dissatisfaction may come to a head.

China's leaders say rebalancing the economy to consumption and away from the investment and export model followed for the last 30 years holds the key to tackling inequality, but detailed data on Friday underlined the scale of that task.

While consumption made the biggest contribution to growth in 2012, with a 51.8% share, Q4 marked the third consecutive quarter of decline.

The fall has been driven by the government's focus on using investment spending as the main expedient to underpin an economy still levered to external demand.

Exports generate about a third of economic activity and sinking demand from foreign customers in struggling European Union and United States economies dragged on growth in 2012. Net exports made a negative 2.2% contribution, data showed.

With China's consumers still relatively poor - average annual urban disposable income was just 21,810 yuan ($3 500) in 2011 - it remains too hard for the government to rely on them to help compensate for any shortfall from the export sector.

"There's just not enough money," said Liu Jiongda, 35, a manager at a Shanghai logistics company who earns just over 11,000 yuan ($1 500) per month, more than half of which goes straight into a mortgage on a property he bought in 2009.

"If the government wants a so-called consumer culture, they have to cut the amount of tax I have to pay. That is simple. If I have more money then I'll be willing to spend more."

Investment meanwhile, at 50.4%, has picked up as the new leadership has looked to underpin a recovery with spending on infrastructure - a tried and tested method.   

Inflation preoccupation

Quarter-on-quarter growth of 2.0% was below the market's expectation of a 2.3% rise, which was taken as a sign that the recovery's momentum is not strong enough to worry the authorities into pre-emptive action to snuff out any whiff of inflation - China's long term policy pre-occupation.

The People's Bank of China, which cut interest rates twice in mid-2012 and cut banks' reserve ratios (RRR) three times since late 2011, has since switched to short-term cash injections via open market operations to guide monetary policy, apparently wary of fanning price pressures or encouraging a property bubble.

"We need to keep vigilant against inflation," NBS chief Ma Jiantang told a news conference on Friday.

The risk of policy tightening looms as growth gathers pace, leaving Beijing with a fine line to tread to ensure the recovery continues without reigniting speculative activity in the key area of real estate.

Data released alongside GDP numbers on Friday showed home prices extending a slow rise in December, with an average rise of 0.3% month-on-month in 70 major Chinese cities, the fifth month in the last six to show an increase, despite government efforts to temper prices.

Real estate investment, which accounted for 13.8% of China's gross domestic product in 2012, rose 16.2% last year from a year earlier and remains a key component of overall fixed asset investment - the cornerstone of Beijing's recovery strategy.

Annual fixed asset investment (FAI) growth was 20.6% in 2012, versus the 20.7% forecast in the Reuters poll.

"Typically FAI falls off at the end of the year - on average December FAI is 1 percentage point lower than November, but this time there was only a 0.1% edge off," said Ken Peng, an economist at BNP Paribas in Beijing, highlighting the strength of investment spending and the risk that it could be fuelling renewed speculation.

Investment spending

Investment spending was the key near-term concern of Ren Xianfang, senior analyst at IHS Global Insight in Beijing.

"We have to watch the investment numbers especially because China has started (to put) controls on local financing, so this could limit fund raising and investment by local governments," she said.

"So far it's just talk, but if they implement measures like the sharp tightening in 2011 the impact on growth could be very substantial," Ren added, highlighting Beijing's policy dilemma.

Other data released alongside GDP showed industrial output grew 10.3% in December from a year ago, versus expectations of 10.1%.

Retail sales in December rose 15.2% on a year ago versus an estimated 14.9% in a Reuters poll.

A fourth-quarter recovery had been heralded by an acceleration in industrial output in October and November and a jump in exports in December, although some analysts believe last month's sharp expansion in trade could be a blip.

China's exports grew 14.1% last month compared with a year earlier, racing past market expectations of 4% and November's 2.9% pace.

Ting Lu, chief China economist at Bank of America/Merrill Lynch in Hong Kong, was confident that the data would not change the near term policy stance.

"Maintaining stable growth is the new leadership's key policy mandate in 2013," Lu wrote in a note to clients, adding that he expected a growth target of 7.5% to be adopted for 2013 and policy calibrated to delivering it.

"Pro-growth policies in 2012 will be extended into 2013, and big-bang stimulus will be avoided unless there is another global financial crisis. Within 2013, policy will likely be marginally tightened towards the second half of 2013 on concerns of rising inflation, rising home prices, investment overheating and financial system risks," Lu said.