After slowing for seven straight quarters, the world’s second-largest economy appears set to finish 2012 with only a muted revival in economic growth, rather than a return to the double-digit pace seen in China over the past three decades.
Annual economic growth dipped to 7.4 percent in the third quarter, the weakest pace since the depths of the global financial crisis in early 2009, but Chinese economic data began to point upward in September, as Beijing ramped up approvals for investment projects, particularly the construction of new rail lines and highways. The central bank has also pumped a large amount of short-term liquidity into the financial system through its aggressive use of open-market operations.
Two purchasing managers' index surveys released earlier this month suggested China’s economic growth was picking up late in 2012, but signs persist that it depends primarily on looser monetary policy and a burst of government spending on infrastructure.
New Year’s Day saw the December official (NBS) manufacturing PMI come in unchanged from November, at 50.6, below consensus of 51. Meanwhile, the HSBC PMI -- a competing index that is more heavily weighted to smaller, private-sector companies – surged to a 19-month high of 51.5 from 50.5 in November.
With inflation poised for a moderate increase, questions about whether the rebound could soon run out of steam began to emerge.
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At the Central Economic Work Conference in mid-December, policymakers confirmed the framework of proactive fiscal policy and prudent monetary policy in 2013. While growth probably bottomed out during the third quarter last year, it should stabilize at around 8 percent this year, barring any major stimulus policies, according to Barclays.
China is expected to announce its official growth target at the annual session of the National People's Congress on March 5.
“Inflation should rise in the coming months, as a consequence of stabilizing growth, rising food prices and quantitative easing in the industrial world,” writes Barclays economist Huang Yiping. “For this reason, we believe that China’s monetary policy has already turned neutral and that further easing is unlikely, unless economic activity cools rapidly again.”
Reports On December Data Coming Soon
Jan. 10 - Consumer Price Index. Economists on average expect China’s annual consumer price inflation to rise to 2.3 percent in December from 2 percent in November. The notable jump is likely to be attributable to food prices. According to the Ministry of Finance, agricultural wholesale prices rose nearly 6 percent month-on-month in December, which is high in comparison to the usual seasonal pattern. Going forward, China could see a new round of inflation due to the impact of chilly weather on vegetable transportation, as well as the consumption rush during the upcoming Spring Festival – which will boost food prices.
Jan. 10 - Producer Price Index. The input price index in the official manufacturing PMI report moved up in December to 53 from 50 in the previous month but still remained below the October level. The uptick suggests that producer prices continued to recover in the past month. But it stood at minus 2.2 percent year-on-year in November and will only turn significantly positive over the coming months if commodity prices take a big step up. Economists are looking for the PPI measurement to come in at minus 1.8 percent in December.
Jan. 10 – Trade. Exports are equal to around 25 percent of China's GDP. A combination of weak demand abroad and rising costs at home has hammered China’s exporters. Growth in exports has faded from 26 percent year-on-year in 2007 to 7.3 percent in the first 11 months of 2012.
The new export order index in both the official PMI report and the HSBC report lost momentum and declined in December, and South Korea’s export growth in December delivered a big disappointment. Thus, the Chinese export picture was probably not cheerful, either.
Economists at Société Générale expect China’s export growth to remain broadly unchanged at about 3 percent year-on-year in December following the surprisingly weak reading in November. This rate would imply a near-zero month-on-month increase.
Meanwhile, import growth is expected to have rebounded modestly to about 5 percent year-on-year in December from a flat reading in November. Hence, the trade balance is expected to decline moderately to $13.9 billion in December.
What Will Drive Growth In 2013
Incoming Premier Li Keqiang repeatedly emphasizes the importance of urbanization as a key theme, but don’t get too optimistic in the short term.
Three important conditions that supported Chinese growth during the past decades – vast labor supply, low production costs and rapid export expansion – are all diminishing rapidly. In addition to this first-wave shock of wage increases, China is facing a second wave of cost shocks from rising funding costs, according to Huang.
The second wave of cost shocks might lead to at least three types of changes: a squeeze on profitability, an increase in financial risks and consolidation in major industries.
According to Barclays’ base forecast, Chinese export growth likely won’t pick up significantly from the current single-digit pace.
Consumption, whether measured by its contribution to GDP growth or its absolute share in GDP, is improving. However, it will likely not be able to lead growth in 2013. This is particularly the case now, given that the government failed to deliver the reform package on income distribution.
“Urbanization should be good for consumption, but the pace of urbanization will likely stay gradual and modest,” Huang said. The government will probably announce some specific measures to boost consumption, including direct and indirect subsidies to low-income or rural households.
Investment may become the wild card. Huang expects the government to introduce some new investment projects after taking the office. However, the size of these investments will be modest, although urban rail projects may pick up as national railway construction decelerates after a significant rise during the fourth quarter last year. Overall, investment should perform slightly better this year, with continued sluggish manufacturing investment and gradually improving property and infrastructure investment.