Chinese rebalancing may be claiming its first victims says Schroders

20th January 2014

China’s fourth quarter real GDP growth slowed slightly to 7.7% year on year from 7.8% the previous quarter, beating City expectations but this brings annual growth for 2013 to 7.7%.

The deceleration found its roots in weaker production and investment, judging by December’s data, which could reflect tighter credit conditions says Schroders emerging markets economist Craig Botham. He says consumption and property construction held up well.

The note adds: “Diving deeper into the growth numbers throws up some surprises. Net exports weakened to form a drag on growth of 0.3 percentage points, having detracted only 0.1 percentage points from growth in the third quarter. That this occurred despite a strong merchandise trade performance this quarter suggests deterioration in the service trade balance. Meanwhile, investment came off slightly, contributing 4.2% to growth, down 0.1% from last quarter.

“Encouragingly for the drive to rebalance, consumption’s contribution climbed 0.4% to 3.9%. However, this remains below pre-2013 levels, and includes government expenditure, so any optimism should be very limited”.

Botham points out that the monthly data supports the construction of resilient households providing economic strength. He says: “Retail sales grew 12.2% year on year in real terms, the highest growth rate for a year. Meanwhile, the property sector reported 35.1% growth year on year in new starts in December, continuing the strength seen in November. However, with sales contracting 0.7% in December we might be about to see a slowing in the sector, particularly with tighter liquidity conditions in place.”

“Unfortunately, the monthly data also points to weakness in investment and manufacturing. Industrial production growth slowed to 9.7% year on year, while investment in infrastructure fell sharply and actually contracted 3.2% year on year. Again, with tighter credit and in particular stricter controls on local government borrowing, it is hard to see infrastructure investment performing strongly in the year ahead”.

He adds that while China managed a fairly strong end to 2013, the fund firm see weakness ahead. “Though exports should perform well as the global recovery plays out, the outlook for investment is bleaker than it has been for years. The push to tighten credit and rebalance the economy could be claiming its first victims, though we expect reformers will slow their pace if the body count climbs too high.”

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