Analysis: China upturn underscores need to rebalance economy

Sun Jan 20, 2013 4:28pm EST
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By Xiaoyi Shao and Koh Gui Qing

BEIJING (Reuters) - 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 Beijing 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, casting doubt on whether Xi Jinping and Li Keqiang - President- and Premier-in-waiting, respectively - can really rebalance the economy and lever its giant size to deliver widespread wealth.

"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 ($640 billion) stimulus to counter the impact of the global financial crisis.   Continued...

A construction site of a residential compound is reflected on the glass facades of a office building in Taiyuan, Shanxi province, January 15, 2013. REUTERS/Stringer