Confirmation of a rebound in China’s economic growth lifted stock markets on Friday morning, boosting mining companies, even as economists warned that the recovery rested on shaky foundations.
Asian and European markets moved confidently higher, with Britain’s FTSE 100 rising by 0.5% to 6,160.
Markets had been anxiously awaiting the official Chinese data that showed that GDP growth rebounded to 7.9% year on year in the fourth quarter of 2012, from 7.4% in the previous three months. Both the overall growth figure and separate numbers on retail sales and industrial production in December were better than expected.
This further evidence that the Chinese economy is recovering – avoiding a ‘hard’ landing’ – adds to optimism that major economic risks to the global economy are fading which has seen stock markets start 2013 on a high. Politicians in the US reached a deal to avert a fiscal cliff catastrophe, while the eurozone crisis remains on pause, with Mario Draghi’s pledges to back the euro still ringing in investors’ ears.
However economists were already worrying about the strength of the economic rebound in China after today's figures. They question the sustainability of the investment spending underpinning growth and China’s new leaders’ intentions. Today’s stats showed fixed asset investment growth was slightly weaker than expected in December.
‘Overall, despite the upbeat headline figure we are left wondering how long this investment-led acceleration in growth can continue,’ commented Mark Williams of Capital Economics. ‘Further policy loosening would help, but would be rash given existing concerns about over-investment’.
China’s economic rebound: what the economists say
Xianfang Ren, IHS: ‘The worst is probably over for the economy… but it is quite a narrow escape, as quarterly growth dips to as low as 7.4% in Q3 and China already had seven straight quarters of deceleration by then—even longer than that after the Asian financial crisis.’
Li-Gang Liu, ANZ: ‘Faster implementation of China’s fiscal programmes after May last year, together with relaxed access for firms and local government financing vehicles to access the bond market, have propelled a steady recovery of the economy since September last year.’
Janet Zhang, GK Dragonomics: ‘While the recent turn in the economy is real, the true test for China’s new leadership is not whether they can manage the cycle, but whether they can put longer-term growth on a stronger footing.’
Ting Lu, Bank of America Merrill Lynch: ‘Despite consensus on growth recovery, economists are debating on when yoy GDP growth will peak. We expect it will peak at around 8.3% in 1H13 and slow to 8.0% in 2H13.’
Yao Wei, Societe Generale: ‘While infrastructure investment strengthened in December, nearly all the other sectors weakened somewhat. This pattern feeds the concern that the Chinese economy has become too reliant on state-driven investment, which in turn hinges on local government's credit access.’
Flemming Nielsen, Danske Bank: ‘The outlook for H1 13 remains relatively strong and we expect GDP growth to accelerate further in the coming quarters. However, H2 13 could prove more challenging as the impact from fiscal easing will start to wane and People's Bank of China could move towards a tightening bias.’
Miners lead London higher
In London mining companies, which closely trace the fortunes of China’s economy, led the FTSE 100 higher. Rio Tinto (RIO.L) clawed back some of yesterday’s losses, up nearly 2% to 3,507p. Evraz (EVRE.L) and Kazakhmys (KAZ.L) made similar gains, to 297p and 792p respectively.
Xstrata (XTA.L) shares however weren’t participating in the rally, down 0.3% to 1,134p after the miner announced that its merger with Glencore (GLEN.L) was being delayed until 15 March. The pair blamed ‘regulatory processes in South Africa and China’. Glencore shares dropped 0.4% to 378p.
Ashmore (ASHM.L) was the biggest faller on the blue chip index though, down 2.6% to 355p after UBS cut its rating on the asset management company from ‘buy’ to ‘neutral’.
Shares in 250-listed Bovis Homes (BVS.L) also fell, off 0.7% to 632p, despite telling the market it expects its full year profits to beat expectations. Analyst Mark Hughes of Panmure Gordon kept the faith in the housebuilder, raising his target price to 650p from 622p. ‘It would appear that Bovis Homes is having its moment in the sun,’ he commented. ‘This is an excellent trading statement with good growth in sales, prices and margins. Bovis is now our only Buy recommendation in the sector.’
Retail pain knocks pound
The pound fell by 0.3% as weaker than expected retail sales figures, down 0.1% month on month in December, added to concerns that the UK economy contracted in the last three months of 2012.
As a result more stimulus would be needed, economists suggested. ‘We anticipate further QE, possibly in February, with the US debt ceiling story adding to worries for the near-term risk environment and business sentiment,’ said James Knightley of ING.