China Q4 GDP slightly beats expectations, with economy bracing itself for Trump

A woman uses her mobile phone as she walks past a store in Beijing on Jan 13, 2017.
A woman uses her mobile phone as she walks past a store in Beijing on Jan 13, 2017.PHOTO: AFP

BEIJING (BLOOMBERG) - China's economy accelerated for the first time in two years in the final quarter of 2016, cementing an economic stabilisation that's giving leaders a buffer as they transition to neutral policy and prepare for potential trade tensions with Mr Donald Trump.

Gross domestic product increased 6.8 per cent in the three months through December from a year earlier, compared with a 6.7 per cent median estimate in a Bloomberg survey. The full-year expansion of 6.7 per cent was the slowest since 1990, but still landed right in the middle of the 6.5 per cent to 7 per cent official target.

China powered through a volatile start to the year with strength that surpassed expectations. With manufacturing rebounding and deflation tamed, the central bank is turning to neutral policy to address a debt binge that inflated asset bubbles during a two-year easing cycle.

Retail sales increased 10.9 per cent from a year earlier in December, compared with the projected 10.7 per cent advance.  Industrial production rose 6 per cent in December from a year earlier, compared with and estimated 6.1 per cent rise.  Fixed-asset investment excluding rural areas expanded 8.1 per cent for the full year.

Strengthening consumption and investment point to continued robust growth before a twice-a-decade Communist Party leadership reshuffle this year. Masked by the stable headline figures is a widening divergence among regions and industries that's creating winners and losers across the nation of 1.4 billion people.

The full-year expansion in 2017 will edge lower to 6.4 per cent, Bloomberg economist surveys show, while the International Monetary Fund has raised its forecast to 6.5 per cent. Maintaining growth requires fending off policy challenges including a slumping yuan that posted its biggest annual drop in two decades. Foreign reserves fell by US$320 billion last year, and a Jan 1 reset of an annual $50,000 transfer cap risks more capital flight pressure.

Policy makers unleashed more fiscal stimulus last year to help prop up growth, in addition to keeping the old benchmark interest rate at a record low. New money supply management tools are coming to the fore as an alternative to broad easing that could further undermine the currency.

Reflation has been a bright spot as the producer price index snapped four years of deflation. Manufacturing has strengthened with official gauges at or near multi-year highs.

Beyond those promising signals, exports have fallen for months amid tepid global demand. That's just as China's government prepares for potential trade tensions with Mr Trump.

While the economic rebalancing towards consumer-led growth continues, reforms of inefficient state-owned enterprises in heavy industries have stalled as the old smokestack economy came roaring back last year, competing more for capital against private firms.

Credit growth remains robust with shadow banking making a comeback, fueling concerns deleveraging isn't happening despite official pledges. The authorities also are trying to deflate big-city property prices that soared then moderated near year-end on tightening measures.