China ends year of stabilisation on high as consumers spend

China’s economy accelerated for the first time in two years in the final quarter of 2016, cementing an economic stabilisation that’s giving leaders a buffer as they transition to neutral policy and prepare for potential trade tensions with Donald Trump.

Gross domestic product increased 6.8 per cent in the three months through December from a year earlier, compared with a 6.7 per cent median estimate in a Bloomberg survey. The full-year expansion of 6.7 per cent was the slowest since 1990, but still landed right in the middle of the 6.5 per cent to 7 per cent official target.

China powered through a volatile start to the year, propelled by robust consumption from an increasingly wealthy middle class. With manufacturing also rebounding and deflation tamed, the central bank is turning to neutral policy to address a debt binge that inflated asset bubbles and may threaten the long-term outlook.

Retail sales increased 10.9 per cent from a year earlier in December, the strongest reading in a year and more than the projected 10.7 per cent advance 

Industrial production rose 6 per cent in December from a year earlier, compared with an estimated 6.1 per cent rise.

Fixed-asset investment excluding rural areas expanded 8.1 per cent for the full year.

"As China’s traditional growth drivers of investment and exports have weakened, Chinese private consumption has become the key engine for economic growth," said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore. 

That points to continued stable growth ahead of a twice-a-decade Communist Party leadership reshuffle this year. Consumption contributed 64.6 per cent to 2016 growth. Services, which accounted for more than half of output for the first time in 2015, made up 51.6 per cent last year, official data showed.

Yet, behind the solid headline figures, there’s a widening divergence among regions and industries that’s creating winners and losers across the nation of 1.4 billion people.

The full-year expansion in 2017 will edge lower to 6.4 per cent, Bloomberg economist surveys show, while the International Monetary Fund has raised its forecast to 6.5 per cent. Maintaining growth requires fending off policy challenges including a slumping yuan that posted its biggest annual drop in two decades and increasing capital flight pressure.

Policy makers unleashed more fiscal stimulus last year to help prop up growth, in addition to keeping the old benchmark interest rate at a record low. New money supply management tools are coming to the fore as an alternative to broad easing that could weaken the yuan.

Reflation has been a bright spot as the producer price index snapped four years of deflation. Manufacturing has strengthened with official gauges at or near multi-year highs. Beyond those promising signals, exports have fallen for months amid tepid global demand.

That’s just as the government prepares for potential tension with Trump. US Treasury Secretary nominee Steven Mnuchin said during a confirmation hearing he would label China a currency manipulator if warranted, after Trump backed off a pledge to do so immediately.

While the economic rebalancing toward consumer-led growth continues, reforms of inefficient state-owned enterprises in heavy industries have stalled as the old smokestack economy came roaring back last year, competing more for capital against private firms.