China's 2013 economic growth dodges 14-year low but further slowing seen

BEIJING Mon Jan 20, 2014 6:17pm IST

Labourers work at a construction site in Shanghai, January 16, 2014. REUTERS/Aly Song

Labourers work at a construction site in Shanghai, January 16, 2014.

Credit: Reuters/Aly Song

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BEIJING (Reuters) - China's economy narrowly missed expectations for growth to hit 14-year lows in 2013, though some economists say a cooldown will be inevitable this year as officials and investors hunker down for difficult reforms.

The chance that the world's second-largest economy may decelerate in coming months was underscored on Monday by data that showed growth in investment and factory output flagged in the final months of last year.

Waning momentum capped China's annual economic growth at a six-month low of 7.7 percent in the October-December quarter, a slowdown some analysts say may deepen this year as China endures the short-term pain of revamping its growth model for the long-term good.

Full-year growth in 2013 was 7.7 percent, steady from 2012 and just slightly above market expectations for a 7.6 percent expansion, which would have been the slowest since 1999.

"It's like a Chinese medicine," said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.

"If you don't take it, you may have problems in future. But if you take it now, you cannot expect to regain your youth tomorrow."

After 30 years of sizzling double-digit economic growth that lifted many millions of Chinese out of poverty but also devastated the environment, China wants to change tack by embracing sustainable and higher-quality development instead.

That means reducing government intervention to allow financial markets to have a bigger say in allocating resources, and promoting domestic consumption at the expense of investment and exports.

Monday's data from the National Bureau of Statistics showed China's 56.9 trillion yuan economy is still very much dependent on investment for growth.

Capital formation accounted for 54 percent of China's economic growth last year, exceeding the 50 percent share taken up by consumption. Net exports, on the other hand, detracted 4.4 percent from overall growth.

"I don't see any evidence of a rebalancing last year," said Tim Condon, an economist at ING in Singapore.

Yet there are signs Beijing wants to rein in investment.

For the whole of 2013, China's fixed-asset investment climbed 19.6 percent, the smallest increase in at least 10 years and a tick below forecasts for a 19.8 percent rise.

Ambitious investment by local Chinese governments that have racked up some $3 trillion worth of debt has been at the forefront of China's investment drive in recent years, a trend that must be checked, said Ma Jiantang, head of China's statistics bureau.

"In 2014, I believe reforms will continue to be a key driving forces for economic growth," Ma said on Monday.

Graphic - China's economy in graphics link.reuters.com/zeq95s

Video - Exporters bear the brunt of China's economic transformation link.reuters.com/gym26v

Breakingviews: China's hot money headache link.reuters.com/dum26v

DOING WELL

To be sure, the gentle fall-off in growth is welcomed by most experts as a must-have in China as it transits to better-quality development.

If growth continues to ease in a controlled manner, China's government can impose some difficult changes without worrying about a spike in job losses that will stir social discord.

It will also give Beijing the latitude to keep monetary policy stable this year, as most economists expect it will likely do, even as regulators continue to crack down on riskier lending, the fallout from which is unnerving some stock market investors.

"On the whole, the Chinese economy is performing well through its adjustment phase," said Brian Jackson, chief China economist at IHS Global Insight.

Concerns that China may sacrifice too much growth in its bid to enact change are also unfounded, Jackson said.

Though an average of the 2014 growth targets already issued by 22 of China's 31 local governments shows growth has been revised downwards by nearly a percentage point, large provinces that are China's commercial centres have mostly kept their growth targets stable, he said.

Still, there is little doubt China's economy is losing steam.

Factory output growth fell to a five-month low of 9.7 percent in December from a year earlier as factories struggled with lukewarm demand at home and abroad.

Indeed, a Reuters visit to southern China this month showed many factories in China's manufacturing heartlands have closed earlier than usual this year for the nation's biggest holiday, discouraged by weak orders and rising costs.

Other indicators also pointed to muted activity.

China's steel output dropped for the third consecutive month in December, while oil consumption rose at its slowest rate in five years in 2013. China is the world's second-largest oil user.

ABOVE 8 PERCENT GROWTH?

That said, a minority of analysts are predicting China's economy may speed up this year, confounding a prevalent belief that growth will slacken to make room for reforms.

Deutsche Bank expects China's growth to accelerate to 8.6 percent this year while RBS thinks it may climb to 8.2 percent.

"We expect China to benefit from improved global growth this year," said Louis Kuijs, an economist at RBS in Hong Kong.

China has yet to announce its economic growth target for 2014 but most analysts agree that the fruits of reforms, if reforms are to succeed, are unlikely to juice the Chinese growth engine any time soon.

Sources with top think-tanks have told Reuters that the government will likely stick with its 7.5 percent economic growth target again in 2014.

"Reforms won't produce results overnight." said Xu Hongcai, a senior economist at China Centre for International Economic Exchanges, a think-tank.

(Additional reporting by Shao Xiaoyi and Jonathan Standing; Writing by Koh Gui Qing; Editing by Kim Coghill)

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