China 4Q GDP Growth Seen Rebounding To 7.8%, Full-Year Expansion To Be Lowest In 13 Years

 @moranzhang
on January 16 2013 6:10 AM

Economic growth in China, the world’s second-largest economy, may have quickened to 7.8 percent in the fourth quarter, snapping seven straight quarters of weaker expansion, but some analysts warn that the recovery is likely to be tepid and the modest rebound could peter out in mid-2013.

“The figures that we saw for October and November were pretty strong, and the export figures for December were already quite strong too, compared with in the third quarter,” said Victoria Lai, China analyst at the Economist Intelligence Unit. “So I think that kind of underpins why we think the pickup will reach 7.8 percent in the fourth quarter.”

The gross domestic product and activity data will be released by the National Bureau of Statistics at 9 p.m. EST on Thursday. China’s GDP plumbed to 7.4 percent in the third quarter of 2012 – the weakest expansion since the depths of the global financial crisis in early 2009.

Economists polled by Reuters are predicting economic growth of 7.7 percent for all of last year. That would mark the slowest full-year expansion in 13 years. China’s economy has been growing at roughly 10 percent annually since it embraced economic reforms and free-market principles more than 30 years ago.

The government target for 2012 was 7.5 percent GDP growth, though policymakers routinely set targets they expect to exceed.

December Data

Trade data released last week showed the value of China's exports grew to a seven-month high of 14.1 percent in December, but the year-end export surge was not enough to help China meet its 2012 growth targets for trade, underlining that exports have been the biggest drag on its economy for two years.

Net exports from China have subtracted from its GDP growth since March 2011, and had shaved 0.4 percentage points off GDP expansion in the third quarter. China's trade sector supports an estimated 200 million jobs.

In 2012, export growth slowed to 7.9 percent from 20.3 percent in 2011, and import growth dropped to 4.3 percent from 25 percent – both well under their 10 percent target. The sharp decline reflects slowing external and domestic demand, as well as falling export and import prices.

Mired in its debt crisis and a deepening recession, Europe has been the biggest headache for Chinese exporters. The U.S. replaced Europe as China’s largest trading partner last year, receiving exports worth $351.8 billion, just exceeding the $334 billion to the European Union.

For 2013, exports will likely growth by 8 percent and imports by 9 percent, according to Barclays Capital analysts in Hong Kong led by Jian Chang.

External uncertainties likely will continue to weigh on China’s growth recovery in 2013, but a stabilizing U.S. economy and robust emerging markets recovery should provide a cushion,” Chang said in a note to clients.

The trade numbers followed weaker-than-expected bank lending figures in December.

Central bank figures showed banks were shown lending 454.3 billion yuan ($73.11 billion) of new yuan loans in December, missing market expectations for a 550 billion yuan rise. But bank lending matters less to credit conditions than in the past.

Policymakers focus increasingly on the People’s Bank of China’s broader “total social financing” measure, which showed a net increase in credit of 1.6 trillion yuan last month, up from 1.1 trillion yuan in November.

“That said, even on this broader measure, credit growth is leveling off, which strengthens our view that the economic rebound will peter out in mid-2013,” writes Mark Williams, chief Asian economist at Capital Economics, in a note to clients.

Meanwhile, two separate purchasing managers' index surveys of the vast manufacturing sector suggested China's economic growth was picking up late in 2012, although signs persist that it is still depending primarily on state-led investment and a heating up of the housing market.

Pro-Growth Policies

The modest recovery seen in China follows a raft of pro-growth policy steps over recent months.

In September, China gave the green light to 60 infrastructure projects worth more than $150 billion. The country’s powerful economic planning body, the National Development and Reform Commission, announced approvals for 25 subway projects, 13 road construction projects, five port projects and two waterway projects.

Chinese leaders have promised to maintain a prudent monetary policy and pro-active fiscal policy in 2013.

However, inflation accelerated in China in December as unusually cold winter weather pushed up food prices around the country, sparking speculation that rising prices could hamper Beijing's ability to support China's recovery with interest rate cuts or other moves for fear of igniting a politically dangerous price spiral.

Consumer prices are especially sensitive in a society where the poorest families spend up to half their monthly incomes on food.

Consumer prices rose 2.5 percent over a year earlier, up from November's 2 percent and the fastest rise since June. That was driven by a 14.8 percent jump in vegetable prices after the coldest winter in seven years led to smaller harvests.

Some economists say it is far from worrying levels. “December’s CPI was still well below 4 percent, the government’s target rate, so the Chinese government has quite a bit of room to allow activity to increase,” Lai said.

However, “if it (inflation) goes up any further, then we might see a bit of a pullback,” Lai added.

The EIU's CPI forecast for 2013 is an average of 4.3 percent over the year -- slightly above the government target. Prices are expected to be pushed up by strengthening domestic demand as well as a cyclical upswing in food prices, especially pork.

2013 Outlook

Economists are divided over where the Chinese economy is heading this year.

The EIU is calling for a rebound to 8.5 percent for this year. “We believe that what we were seeing in the fourth quarter was basically the bottoming out of the downward trend that we saw over most of 2012,” Lai said.

OppenheimerFunds’ chief economist Jerry Webman expects a more in-line kind of number for 2013. “I think this year is going to be better than last year, but not markedly better,” he said. “However, hard landing in China is a very exaggerated discussion and never made any sense to me.”

“The government still has a lot of control over where credit is created and how much, and they’ve made it very clear that they don’t want to see a big acceleration beyond the 7.5 percent level,” Webman said. “So we are not going back to 2005-kind of levels, and I don’t think anybody should want that to happen. That’s not a sustainable level of growth.”

The World Bank predicts 2012 growth to end at 8 percent for the year, with 2013 coming in around 7.5 percent.

New York-based aluminum giant Alcoa Inc. (NYSE: AA) said last week when it reported fourth-quarter earnings that demand in China, the world’s largest aluminum user, will grow 11 percent in 2013 to 23 million metric tons as stimulus spending announced by China’s new leadership begins to show its effect.

Others are less optimistic.

The recovery is being driven almost entirely by state-led infrastructure spending and real estate investment, warned Williams and Qinwei Wang, China economist at Capital Economics.

“The recovery will lose momentum later in 2013 unless policymakers introduce significant further stimulus, which does not seem likely. The turnaround in growth remains modest so far,” they said.

The recent strength of property sales is bolstering confidence about the outlook for the sector over the year ahead. Residential property prices rose by the most in 19 months in November, a number of recent land auctions in major cities have ended with higher prices being paid than expected and many developers are reportedly considering adding to their land banks.

“This is not a welcome shift,” Williams and Wang said in a note. “Excess investment in property is one of the main medium-term risks to China’s economy in the wake of the building spree of recent years.”

While investment was slowing until late last year, it nonetheless grew faster than the wider economy for the tenth year in a row.

Capital Economics estimates that investment in residential property accounted for 8.8 percent of GDP in 2012, up from 8.5 percent in 2011 and 4.3 percent in 2002. That is well above the peak for real estate investment in the U.S. in the middle of the last decade and is also above the peak real estate investment rates recorded in Korea and Japan during their periods of rapid growth.

Sustained stronger growth in China requires a turnaround in household spending, which remains unusually low as a share of China's GDP.

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