China's economic slowdown: the start of the dreaded ‘hard landing’?

China’s economy slowed to 8.9% year-on-year growth in the fourth quarter. By global standards – where many countries are struggling to scratch out positive growth figures – this remains a stunning figure, and one that points to a gradual slowdown in the world’s second largest economy.

But some analysts, fearful of a ‘hard landing’ where growth drops below 7%, say the figure overstates the strength of the economy. 

Although the top-line number was better than expected in the market, the figures released by the Chinese statistics office can be interpreted in several different ways: for example the annualised quarter-on-quarter rate sank to 8.2%, significantly below 9.5% in the third quarter. This prompted one analyst, Alistair Thornton of HIS Global Insight, to bemoan China’s ‘aggressive slowdown’ rather than a gradual, easy deceleration. ‘Other indicators point to a faster slowing economy, with real estate investment growth decelerating rapidly in the final month of the year,’ he said.

Ma Jun, an economist at Deutsche Bank, points to further danger signals in the figures for fixed-asset investment (FAI, a measure of China’s capital spending): ‘The worrying trend is the sharper-than-expected deceleration of FAI. ..The main reason is the weakness in real estate construction activities… This suggests that further slowdown in real estate investment for the coming few months will be inevitable.’ In fact, today's figures show that the hyped property market correction is gathering pace.

The investment numbers are a source of constant worry: some analysts say the Chinese have relied on huge investment spending – some of it on white elephants – too much for economic growth. China needs to wean itself off its reliance on investment, but equally something must fill the gap.

Others say the FAI figures just aren’t reliable. ‘We remind markets that the calculation of individual month FAI data is quite inaccurate,’ Bank of America Merrill Lynch’s Lu Ting commented this morning, following harsher critiques from other economists.

The Deutsche Bank analyst also questioned the integrity of the GDP figures: ‘To be consistent, the official Q4 GDP requires a sharp acceleration in agriculture or service sector activities, which is not evident from other indicators.’

‘The worst is still to come, with GDP growth likely to sink over a percentage point lower this quarter,’ added Thornton. But even he does not foresee an imminent hard landing.

But others are more sanguine. The figures are largely better than expected, and show the slowdown is continuing at a gradual pace. This is in line with the expectations of China’s leadership, who this year will hand over the reins of the fastest growing major economy to a new crop of leaders – and want to be sure they pass on a stable and well-managed economy.

What’s more, inflation – previously described as a global threat on a par with the eurozone crisis – is increasingly being brought under control, allowing the government more space to intervene in the economy if need be. Economists at Australian bank ANZ said: ‘Though the GDP gap will remain large in H1 2012, inflation pressures will remain low. Short of an oil shock, we expect inflation to stabilise towards the government’s target of 4%.’

Much depends on China’s ability to achieve its goal of ridding itself of the old low-cost, made-in-China export model, as well as its reliance on investment spending, and instead use its growing consumer base as its primary source of expansion. ‘There is still little sign of progress towards the hallowed goal of rebalancing,’ commented Thornton. ‘Even as external imbalances appear to be resolving themselves, internally the economy is even more skewed towards investment.’

In the short term though, consumer spending 'saved the day' as Yao Wei of Societe Generale put it, with retail sales rising 18.1% year-on-year in December. This was, however, boosted by several short-term factors.