Optimism over China's Economy Surfaces

China's economy shows signs of a pickup after seven quarters of slowing growth, leading to a cautious sigh of relief as the year approaches its end.

Time to welcome the New Year with champagne? Perhaps.

Most analysts and market observers are forecasting that the world's second-largest economy will be on a much smoother keel next year, provided domestic demand expands and the specter of the eurozone debt crisis begins to release its grip on other global markets.

"The economic momentum in China has turned a corner since September, with recent data pointing to a continuing stronger performance," said Huang Yiping, an economist at Barclays. "We look for a moderate recovery in 2013, as the economy transitions to a 'new normal' of slower growth."

China's gross domestic product in the third quarter expanded 7.4 percent from a year earlier, the slowest pace in three-and-a-half years.

Economic data released to-date for the fourth quarter showed industrial production, fixed-asset investment and retail sales all grew strongly. That has encouraged bolder market forecasts of GDP growth of up to 8 percent in the current quarter and 8.2 percent in the first quarter of 2013.

One of the optimists is the World Bank, which raised its forecast for China's growth to 8.4 percent next year from a previous 8.1 percent.

The new year will usher in a new generation of Chinese political leaders. Everyone is asking: "What will be the changes?"

The annual Central Economic Work Conference in Beijing in mid-December provided some glimpses of what might be ahead.

Few changes seen

Zhang Zhiwei, an economist at Nomura, said the most important message from the top leaders is that there will likely be few changes.

"Most of the news release reads very similar to what the government has been saying in the past few months," Zhang said of the conference report.

China leaders said in a statement that a "proactive" fiscal policy and a prudent monetary policy stance would be maintained into the new year to sustain economic growth, bolstered primarily by domestic demand.

More consumer and business spending has become a top priority for 2013. To achieve that, China will "improve structural tax reform, expand social financing, increase appropriate loans and keep the yuan's exchange rate relatively stable," the statement said.

However, restrictive policies will be kept on the property market, it added.

"Overall, the policy stance in 2013 will likely remain loose, in reality," Zhang said. "But we should still pay close attention to inflation, to financial risks in the shadow banking sector, to the property sector and to excessive production capacity in the manufacturing sector, which may worsen under a loose policy stance."

Zhang said he thinks such a loose policy stance may be unsustainable and will have to be shifted to "neutral" or "tightening" in the second half of 2013.

Lu Zhengwei, chief economist at Industrial Bank, said "Chinese wisdom" tells us an official strategy of "no change" leaves room to wiggle if the economy doesn't behave as expected and policy tweaking is needed.

"The new leadership is guarding cautiously against many risks," Lu said.

He points to general phrases in the statement, which mentioned potential risks such as a slower worldwide growth, rising trade protectionism, stronger inflationary pressure, unsustainable growth, overcapacity, increasing production costs and financial risks.

"It is important to note that the leadership leaves a lot of room, especially in monetary policy, to maneuver in response to market changes," Lu said.

The conference report did not specify an economic growth target. That figure is expected to be announced at the National People's Congress in March.

Some economists said they expect the target to remain at 7.5 percent.

Li Jian, director of the trade research institute under the Ministry of Commerce, said the rate would be reasonable and he expects references to "rapid growth" to decrease substantially next year in high-levels meetings and in economic documents issued by the government.