China Upturn Shows Need to Rebalance GDP

China's recovery from its longest slowdown in growth since the global financial crisis is being driven by the two forces posing the biggest risks to the economy's increasingly urgent need to rebalance - investment and property.

The central government wants to raise consumption's share in the economy as the cornerstone effort to close one of the world's widest gaps between rich and poor and quell the discontent among those Chinese who feel they missed out on the country's blistering expansion of the past three decades.

The economy picked up in the fourth quarter as a spurt of infrastructure spending orchestrated by the government broke seven straight quarters of a slowdown. Consumption's contribution to growth fell in the fourth quarter for the third straight quarter even though retail sales were rising in each of the last three months.

Short-term policies to drive the recovery may well explain that because the biggest improvements were real estate-related.

"While the recent turn in the economy is real, the true test for China's new leadership is not whether they can manage the cycle, but whether they can put longer-term growth on a stronger footing," Janet Zhang, an analyst at consultancy, GK Dragonomics, wrote in a note to clients.

Dependence on investment spending - now at around 50 percent of GDP - for three decades of development has created huge industrial overcapacity in China, eroding economic efficiency despite some of the world's lowest labor costs and requiring increasing amounts of capital to deliver diminishing returns.

That worries investors and makes the International Monetary Fund fret about the risk of a capacity glut that could have global consequences.

Analysis by HSBC shows investment growth is contributing more to the economy than at any time since 2009 - the year in which China injected the bulk of a 4 trillion yuan (US$640 billion) stimulus to counter the impact of the global financial crisis.

Economists at UBS noted meanwhile that growth in December's retail sales may have been stronger-than-expected at an eight-month high of 15.2 percent year on year, but the pickup was on household goods, furniture and construction materials tied to rising property transactions.

Low consumption share

It serves to emphasize how hard it is for China to shift the economy's underlying growth drivers.

Consumption might have been the biggest single contributor to 2012's full-year GDP growth of 7.8 percent, but its 51.8 percent share remains far below the 70-80 percent typical in developed rich economies.

Chinese officials are likely to be agonizing anew over the headstrong property market in the wake of GDP data that showed fourth-quarter growth rebounding to a stronger-than-expected 7.9 percent alongside a pronounced upswing in real estate sales, housing starts, investment and home prices.

Property is a hot-button topic for the government because many Chinese complain that prices are out of their reach.

House prices in central Beijing are zooming toward record highs, despite three years of steady policy action to rein-in rises and stifle speculation.

Apartments in the Champion Court housing estate that is a 15-minute walk from the headquarters of the People's Bank of China are selling at all-time-high prices of between 80,000-100,000 yuan (US$12,900-US$16,100) per square meter.

Prices have jumped 10 percent in the past year, data from China's largest online real estate firm Soufun Holdings showed, as Champion Court's proximity to China's financial center draw buyers who think they can benefit from its location.

Official data shows monthly rises in the country's top 70 cities for five of the last six months, the latest in December.

"To be honest, I think prices are unthinkable," said an agent surnamed Jin who declined to give his full name.