China's Year of the Dragon will be a "year of complexity and challenges," despite a last-minute surge in December retail sales that helped the economy finish 2011 slightly stronger than expected.
China's GDP growth slowed to 8.9 per cent in the last quarter, its slowest pace in two and a half years, finishing the year at 9.2 per cent overall, as slowing exports and a deflating property market took their toll.
"In terms of the domestic and international situation, 2012 will be a year of complexity and challenges, so we should be fully prepared," said Ma Jiantang, spokesman for China's National Bureau of Statistics, who also called the international trade environment "gloomy, highly complicated and severe," but said the "fundamental" principles for long-term growth had not changed.
The trade gloom is all the more alarming for China's leaders because this is a leadership transition year, which will culminate in the replacement of President Hu Jintao and Prime Minister Wen Jiabao by anointed successors this fall. That makes economic stability all the more important for policy makers: keeping inflation down, maintaining moderate growth, and making as few dramatic decisions as possible.
"I think they will want to keep things as stable as possible and also keep policy as stable as possible," said Brian Jackson at RBC Hong Kong, who predicts government will make further cuts to banks' reserve requirements to free up lending, but no other immediate changes.
"This year still feels like it's going to be challenging," he said. "But given the way things are looking at the moment, that's probably all they need to do for the time being."
Economists predict 2012 will see a further slowing of growth, to 8 per cent or possibly lower in the first quarter. But despite mounting bad debt, a continuing threat from inflation that limits monetary policy easing and slowing demand for exports, they say the outlook is still better than the darkest moments of 2009.
Retail sales were up 18.1 per cent year over year in December, an increase over November's 17.3 per cent boosted in part by the nearing end of a government rebate on replacing household appliances, a leftover from the 2009 stimulus program that restored Chinese growth. However, property sales growth shrank for the third month in a row, bringing the year down to 4.9 per cent overall, year on year.
Chinese Lunar New Year celebrations, also known as Spring Festival, officially begin this weekend, though hundreds of millions of migrant workers have already begun the trek home for the biggest holiday of the year. More than three billion trips -- more than one per person in this country of 1.4 billion -- are expected in the 40 days surrounding the holiday period.
The pre-Spring Festival period is traditionally a busy time for both retail and property sales; however this year it falls earlier than usual, threatening a slower-than-usual first quarter for 2012.
"These figures confirm our long-held view that China is basically undergoing a substantial, but nonetheless cyclical, economic slowdown. Thanks to the big stimulus delivered from late 2008 through 2010, the country has not seen a cyclical slowdown in some time, and most people may not remember what one looks like," wrote researchers at GaveKal Dragonomics, in a note to clients. "This may be why stories about how China is now entering terminal economic decline have become so popular. But most economic indicators do not support this scenario, and we are still comfortable with our call for GDP growth of around 8 per cent this year."