China's economy picks up pace


China's economy regained speed in the final quarter of 2012, pulling out of a post-global financial crisis downturn that produced the slowest year of economic growth since 1999.

Evidence of a burgeoning recovery in exports, stronger than expected industrial output and retail sales, together with robust fixed asset investment, all signalled 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 per cent in the fourth quarter beat a consensus forecast of 7.8 per cent in a Reuters poll.

Full year growth of 7.8 per cent was also just ahead of the poll's 7.7 per cent call and comfortably ahead of the government's own 7.5 per cent 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.

China's statistics chief, admitting the country's wealth gap was "relatively large", released a recalculated indicator of economic inequality today, the first time in several years that officialdom has addressed the sensitive issue head-on.

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.

Quarter-on-quarter growth of 2.0 per cent was below the market's expectation of a 2.3 per cent 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.

The risk of policy tightening, however, does loom 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 today showed home prices extending a slow rise in December, with an average rise of 0.3 per cent 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 per cent of China's gross domestic product in 2012, rose 16.2 per cent 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 per cent in 2012, versus the 20.7 per cent 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 per cent 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 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 per cent in December from a year ago, versus expectations of 10.1 per cent. Retail sales in December rose 15.2 per cent on a year ago versus an estimated 14.9 per cent 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 per cent last month compared with a year earlier, racing past market expectations of 4 per cent and November's 2.9 per cent 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," Mr Lu wrote in a note to clients, adding that he expected a growth target of 7.5 per cent 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," Mr Lu said.


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