China’s Skyrocketing Consumption And Surging Urban Population

China’s latest GDP number suggests the world’s second largest economy is clearly headed for a soft landing, as opposed to the economic crash many economists forecasted.  Despite delivering the slowest growth rate in over two years, Chinese policymakers have managed to substantially slow down inflation and nearly halve yearly property investing rates, as the Central Party Committee sought to avert overheating and prick a real estate bubble before it turned disastrous.
Skyrocketing retail sales and an urban population that for the first time exceeded China’s rural population should help build the bullish case.

Specifically, China’s economy grew at a rate of 8.9% year-over-year in the fourth quarter, down from 9.1% in Q3, but above estimates that called for 8.7% growth.  The number was the lowest since the second quarter of 2009 when China grew at an annual rate of 7.9%, according to the National Statistics Bureau.

Full year GDP growth averaged 9.2%, compared with 10.4% in the prolific year of 2010.

Breaking the numbers down forces one to acknowledge that China’s central planning has been effective.  While China, like the global economy, faces a myriad of problems, monetary and fiscal authorities managed to control, at least relatively, two of the main problematic indicators.  Inflation, as measured by CPI, was brought down to 4.1% in December, from a July-peak of 6.5%.  Property investment growth slowed to 12.3% in December, from 20.1% in November and 25% in October.

A troubling fall in fixed asset investment, from 24.9% growth in October to 18.3% in December could ring the alarm bells, other data could help offset weakness and support the “soft landing” thesis.  Beyond inflation and a possible real estate bubble, China faces falling exports (as demand from Europe and the U.S. falls) and the continued fear of social unrest.

But a rising urban population and an explosion in discretionary spending should silence the haters.  Retail sales jumped 18.1% in 2011, rebounding in December (up 13.8% compared with 12.8% and 11.3% previously).

Even more interesting, China’s urban population surpassed its rural population for the first time ever in 2011.  According to the National Statistics Bureau, 51.3% of China’s 1.3 billion people now live in cities.  Combine more city dwellers with rising incomes and you get the beginnings of the coveted transition from a purely export-based economy into a dynamic domestic/international machine.

Another bullish sign: China has the reserves and the wiggle room to execute what it calls a “pro-active fiscal policy and prudent monetary policy” stance.  According to Barclays:

Recently, the market has become anxious about the next monetary policy move. The PBoC reiterated its prudent monetary policy stance several weeks ago. And today’s data confirmed that there is no urgent need for aggressive easing.

In our view, the PBoC will likely cut the reserve requirement ratios again in the coming weeks, most likely around the Chinese New Year. This is mainly because liquidity conditions have become tighter recently, evidenced by rising money market interest rates. […] Unless economic activity shows significant signs of weakness, the PBoC is likely to maintain its prudent monetary policy in 2012.

Top Chinese officials have acknowledged the possibility of a hard landing.  In a conference attended by Premier Wen Jiabao and President Hu Jintao, top officials noted the “extremely grim and complicated global outlook.”  The CEWC communiqué, which illustrates economic policy paradigms for the year to come, noted they remained ready to unleash stimulus when and if it is needed.
The People’s Bank of China has already indicated it stands ready to support the value of the yuan by selling $4.4 billion in foreign exchange reserves in November after a $3.9 billion divestiture in October.  Barclays, which expects GDP to grow 8.1% this year, expects reserve requirement ratio cuts, asset purchases (QE), bank deposit and lending rate cuts, and exchange rate fluctuations to be used to help balance the economy.

Chinese equities have had a stellar beginning to 2012.  CNOOC, one of the major oil and gas companies, is up more than 15% so far, while e-commerce biggie Dang Dang gained almost 19%.  Baidu, dubbed the Chinese Google, inched up about 2%.
The world’s second largest economy faces a challenging 2012.  Just like everybody else, China will feel the sting of a slowing global economy (demanding less of its cheap goods), the ripple effects of Europe’s sovereign debt crisis, and the volatility of global commodity markets.  Tuesday’s GDP numbers, though, suggest Wen, Hu, and the gang will manage to keep the boat afloat and steady this year.

Forbes