Leaner times may lie ahead for second-largest economy

As expected, economic growth slowed in China last year prompting a bout of questions about the economic outlook for the year of the horse, which starts on Friday.

While there is general consensus that China’s economy is gaining in depth and that high-energy double-digit growth days are no longer suitable in a changing economy, there are mixed signals coming from analysts. However, it’s looking like president Xi Jinping’s efforts to bring in a significant reform package could mean leaner times ahead for the world’s second- largest economy.

China’s economy grew 7.7 per cent last year after lower investment growth led to a cooling in the final quarter. Growth in the €6.9 trillion economy was unchanged from revised levels in 2012.

One of the most notable changes in the data was how the services sector is now bigger than the manufacturing sector. Its share of gross domestic product (GDP) rose to 46.1 per cent, outstripping the manufacturing sector for the first time.

This ties in with efforts by Xi to retool the Chinese economy, with the leader, who was installed last March, redoubling his efforts to transform its economy by promoting domestic consumption ahead of exports and investment. China may lose further momentum this year.

Slower growth
As the government tries to steer the economy away from investment-led growth, expansion of fixed-asset investment is at decade lows. "We are likely to see a continuation of slower but more sustainable investment growth in 2014 as policy-makers focus on rebalancing the economy to domestic consumption," said Moody's Analytics in a research note.

Lombard Street Research analyst Diana Choyleva said the growth slowdown this year will be faster than many expect “not least because the downturn over the past two years has been much weaker than the official numbers show”.

She says China’s fundamental problem is its excessive savings rate and “warped financial system” which have skewed its development towards unproductive investment at the expense of consumer spending.

Investment in property in China accelerated 19.8 per cent last year, a sign the booming market has resisted Beijing’s sustained efforts to cool it down.

“With credit conditions likely to remain relatively tight, we expect investment spending and economic growth to slow further in 2014,” the economic research group Capital Economics said in a note to clients.

There were positive signs in the recent raft of data. Retail sales grew 13.6 per cent in December from a year earlier, while the amount of goods coming out of China’s factory gates rose 9.7 per cent. “We maintain our view of ‘being optimistic and realistic’,” analysts at Barclays wrote.

Barclays expects good progress in areas that should help the services sector, such as deregulation, fiscal and tax reform, financial sector development, services liberalisation and rural-urban integration.

There is a gloomier backdrop among companies, however.

Business confidence slumped in January to the lowest level in four months, following December’s sharp rise, with firms reporting falls in nearly all activity indicators, according to the MNI China Business Indicator.

The indicator fell to 52.2 in January from a two-year high of 58.4 in December with some companies reporting weakened demand ahead of the Chinese new year holiday.

The December high was potentially boosted by improved hopes for the Chinese economy following the third plenum meeting in November, which have now dissipated.

“While the stimulus measures over the summer of 2013 helped to boost some of the business activity measures in the survey, particularly new orders, many of these have now fallen back,” MNI said in a statement.

The Chinese government, as ever, remains upbeat.

"Key 2013 economic indicators have turned out to be within the range, as China created more than 10 million new jobs and inflation came in at 2.6 per cent for the whole year," according to the official report on Xinhua, and they said it was "a good report card" presented to China's leaders, under Xi.

Banking system
The debate about the risks provided by shadow banking, credit intermediation involving entities and activities outside the regular banking system, is likely to continue long into the year of the horse.

UBS analyst Wang Tao says that while the strength of global demand and Chinese exports is a risk to growth, liquidity squeezes and credit volatility are a threat, caused by de facto interest rate liberalisation and rapid growth of shadow banking, “as well as a tightening bias in policy to slow credit growth and defaults in the shadow banking market that could have a ripple effect on overall liquidity and credit conditions”.