China's growth may dip below 8 per cent in 2012. Yet, most China watchers are still predicting close to 9 per cent growth. There are three things that could push the country's GDP growth to a 10-year low: falling house prices, a slump in property investment, and slowing exports. Last time Beijing stimulated the economy; it can ill afford a second round.
A property market crash is the biggest risk. A handful of developers had slashed new unit prices 20 per cent by mid-December after years of pricing mostly increasing. Most people believe the growth-obsessed policy makers will come to the rescue soon. But the authorities risk losing credibility if they allow the housing bubble to grow further. Some provinces have even been told to put purchase restrictions back after quietly lifting them.
A slump in property investment would deal a big blow to fixed-asset investment, which provides about half of China's GDP growth. Developers are already slowing down construction to preserve cash. They can't expect much help from banks, who are strapped by increased capital ratio requirements. Provinces and cities can commission affordable housing to keep developers busy, but with local government revenue falling, it's not clear they have much firepower.
Trade may be a negative contributor to GDP growth. The country's trade surplus shrank rapidly in 2011, and China could conceivably post a deficit in 2012 in more than one quarter. Its Asian neighbours are gaining competitiveness from their depreciating currencies, and Beijing can't let the yuan fall far, for fear of trade friction with the United States.
There are other less predictable drags on growth. Falling home prices would hurt sales of cars, furniture and household appliances. Beijing can try to boost them by cutting taxes and imports tariffs. But in a slowdown, the government may already be facing pressure on its tax haul.
At best, China will muddle through 2012 with sub-par growth. But the real unknown is confidence. If house prices start falling sharply and homeowners and consumers start to despair, even another government stimulus might struggle to prop up the economy. In that scenario, even an 8 per cent GDP increase might start to look optimistic.