China in 2013: A Year of Transition
Shen, Minggao, The China Business Review
China's economy will continue to grow at a high rate, and the government will implement reforms incrementally.
China is entering a pivotal decade that could bring the country lasting prosperity. The 18th National Congress of the Chinese Communist Party (CCP) has concluded a full power transition for the first time in its 91 -year history. This has cleared political uncertainty in the near term. But unlike their predecessors, China's new leaders are unlikely to rule over an economy growing at double-digit rates, and they have been called on to ensure economic growth is more balanced and beneficial for all Chinese citizens. The new leadership wants to double the size of the economy and per capita household income by 2020. Analysts may have high expectations for reform or rebalancing, but the reality is that reforms will likely be incremental and focus on stability.
Growth in 2013 will likely be shaped by policies in three stages: on-going policies from 2012, initiatives introduced for 2013 at December's Central Economic Work Conference, and the policies announced at the 3rd plenary session of the CCP Congress in 2013. Citi expects China's GDP to grow at a rate of 7.8 percent and 7.3 percent in 2013 and 20 14, respectively. A hard landing - GDP growth below 5 to 6 percent a year - can only be avoided over the next five years if the new leaders embark on substantial and timely structural reforms.
THE REBOUND IN 2012 SHOULD CONTINUE
The macro economy has shown an upward trend in the fourth quarter of 20 1 2 and that growth will probably continue in the first half of 2013. Relatively accommodative monetary policy by the People's Bank of China and accelerated infrastructure investment have contributed to the growth rebound. This has been confirmed by various measures of China's manufacturing activity that are now showing expansion after months of contraction, including Citi's China leading indicator reading, which is a combination of variables such as steel production and power consumption. The rebound in China's GDP growth is largely driven by cyclical factors. In our view, the economic growth rebound will likely be mild and temporary unless there is more policy support from the Chinese government. Retail sales have accelerated, but given its relatively small share of consumption in GDP, retail sales alone cannot sustain this level of GDP growth.
The cyclical rebound was led by infrastructure investment and will likely be capped barring a stimulus in 2013. This trend will likely be extended to the first half of 2013 due to the low base this year. The recent rebound of infrastructure investment came with no aggressive stimulus and might have crowded out investment elsewhere. Given that policy tightening in the property sector may continue, the upside of its investment will likely be capped. Export growth will be influenced by the impacts of the "fiscal cliff" negotiations in the United States over taxes and spending. Assuming major spending cuts or tax hikes can be avoided in the United States, the export growth rate will likely be in the single digits again next year.
POLICY INITIATIVES IN 2013 WILL MATTER
The economic recovery in China will likely be determined by policy and investment initiatives under the new leadership. During the recent CCP Congress, members of the new Chinese leadership highlighted areas of future growth that include upgrading industrial technologies, information technology, urbanization, agricultural modernization, and environmental conservation. To double the size of the economy by 2020 in real terms, the new leadership will need new policy initiatives, such as a stimulus package or other measures that would help rebalance the economy towards more consumer spending. The former requires new sources of funding, while the latter involves inventing new growth engines. The latter is more probable, although the reforms will likely be incremental.
Investment will be the key instrument to sustain growth in the near term, and Citi expects investment growth to accelerate in 20 1 3. …