China growth: be bullish in the first half, cautious after

The People's Bank of China could tighten monetary policy later in the year following better than expected growth, economists say

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China's economic growth sends a bullish signal for the first 6 months of 2013 but investors should be prudent afterwards as growth may peak in the second half in the absence of more monetary and fiscal stimulus, according to various analysts.

The world's second-largest economy grew by 7.8% last year, down from 2011's 9.3% and the lowest figure in more than 10 years, but beating the government's target of 7.5% and expectations of 7.7% in a Reuters poll of analysts.

Stock markets rallied on the data. Japan, whose economy depends on exports to China, saw its Nikkei index closing up 2.86%, also helped by hopes that the Bank of Japan will ease monetary policy further. The Shanghai Composite index finished 1.41% up while South Korea's KOSPI rose 0.7%.

The government is likely to set targets of 7.5% GDP growth, 3.5% inflation and 13% money supply growth for this year, compared with last year's targets of 7.5% for growth, 4% for inflation and 14% for money supply, Ting Lu, China economist at Bank of America Merrill Lynch, predicts.

Lu expects China's growth to peak at around 8.3% in the first half of this year and to slow to 8% in the second half.

"Our suggestion to investors is to remain bullish in the first half of 2013 but to exercise more caution in the second half," he said.

In addition to growth peaking in the first half, inflation might quicken and even hit the government's target at some point in the second half, while home prices may rise faster in the spring and trigger worries about stricter tightening in the second half, according to Lu.


"The current honeymoon" enjoyed by China's leaders could cool down after the spring and an investment boom by new local governments in the name of urbanization may have to be cooled, he added.

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"Finally, perpetual China bears will likely launch a counterattack in mid-2013 when growth peaks and inflation rises, with focus on favorite issues such as shadow banking, government debt, over-investment and property bubbles," Lu said.

China's GDP figure for 2012 confirms that the economy has bottomed out and started a moderate recovery, but the second half of this year "could prove more challenging as the impact from fiscal easing will start to wane and the People's Bank of China could move towards a tightening bias," said Danske Bank senior analyst Flemming Nielsen.

"With the jump in inflation from 2% y/y to 2.5% y/y in December, strong credit growth and a recovery in the housing market since May last year we are unlikely to see additional monetary and fiscal stimulus, but there will continue to be a positive impact from the fiscal easing implemented last year," said Nielsen.

"With inflation expected to pick up gradually, we think that People’s Bank of China will move towards a tightening bias at some stage in the second half of 2013 but we do not yet expect a hike in the leading interest rates in 2013."

The better than expected growth environment offers China's new leaders more room to push through structural reforms, but "that probably means less policy easing as well," Societe Generale's China analyst Wei Yao said.

She noted that housing inflation sticky, with the number of major cities that recorded month-on-month home price gains increasing to 54 out of the 70 surveyed in December from November's 53.

"Stubborn housing inflation in those well-known cities is probably a big enough concern for policymakers to cap the scope for further monetary easing in 2013, if any," Yao said.