- Chinese economy on the turn
- Exports finally improving
- Property market risks contained
- Intra-Asia trade a big growth driver


By Greg Peel

Signs have emerged that the Chinese economy has finally bottomed out begun a recovery after a long slow-down. The recovery is nevertheless expected to be moderate in Chinese terms from here, and as Danske Bank notes there remains a question as to whether the slow-down through 2012 was structural or cyclical.

If structural, there is no reason to expect a substantial recovery, Danske warns, as any stimulus will fail to boost GDP growth and simply boost inflation instead. However the fall in China's inflation rate from 6.5% in late 2011 to under 2% now suggests the slow-down has largely been a cyclical event.

The greatest fear outside observers have had with regard to a Chinese "hard landing" over the last couple of years have been rooted in a bubbling property market and Beijing's attempt to deflate that bubble. However sales of new homes in China began recovering in May and have continued to do so since, Danske notes. New housing starts saw a sharp decline late last year hence the demand-supply balance in housing has improved substantially and house prices have increased moderately.

There remains an unsold inventory overhang nevertheless, but at least housing construction no longer appears to be subtracting from Chinese growth, Danske suggests, if not actually adding to it.

In the meantime, monetary policy in China has remained largely neutral despite two interest rate cuts in 2012. Stimulus has been provided through infrastructure spending, although there is little transparency on actual size, the analysts note. There is evidence of an impact , however, given a marked improvement in in transport and public utilities. Private consumption also appears to have picked up, particularly in home building materials/furniture, while auto sales have remained subdued due largely to the boycott in place on Japanese cars.

China's export industry has been shattered by falling European, and to a lesser extent the US, demand, yet exports have rebounded significantly through the December quarter as sales to other Asian emerging markets have grown, providing an offset. Imports remain subdued nevertheless, Danske notes, suggesting that inventories are still being cut. This should ease over the next few months, the analysts suggest, and along with improved domestic demand should benefit those exporting to China.

Danske expects Chinese GDP growth to peak above 9% in mid-2013. With new leadership uncertainty now removed, investment should enjoy a boost. There will be a particular focus on accelerating the pace of financial market reform, but by the second half 2013 the impact of recent infrastructure stimulus should start to wane.

With China's property sector now under control, Europe and the US provides the greatest external risks ahead. However the greatest risk for China, in Danske view, is centred in the pace of decline of China's long-term growth potential. Despite its large population, China cannot grow at a rapid clip forever and one day growth must plateau out as China stops "emerging" or "developing" and joins the ranks of the "developed".