China's economy grew at its weakest pace in 2-1/2 years in the latest quarter and it appeared headed for an even sharper slowdown in the coming months as export demand fades and the housing market falters.
The Q4 year-on-year growth of 8.9%, although slightly stronger than the 8.7% that economists polled by Reuters had predicted, may give Beijing yet another reason to gently ease monetary policy, most likely by reducing the amount of reserves that large banks must hold.
The data released on Tuesday may not satisfy investors, who were looking for figures that were either weak enough to provide a clear-cut case for policy easing or strong enough to allay fears that the world's second-biggest economy might unravel.
"The slowdown is not scary, so we are not going to get massive policy easing," said Kevin Lai, an economist with Daiwa in Hong Kong.
Shanghai stocks pared gains in low-volume, volatile trading after the data was released. The euro and Australian dollar both extended gains against the US dollar as investors took some solace in the fact that China's growth rate was a bit faster than expected.
With Europe in danger of slipping into a recession and US growth looking lackluster, China's role in the global economy is magnified.
Although economists widely expect China's 2012 growth will be the weakest in a decade, a more pronounced slowdown would put a major drag on already shaky global growth.
The Q4 growth rate was the slowest pace since the second quarter of 2009, when the global economy stumbled out of a deep recession.
Ma Jiantang, the head of China's statistics agency, said China's growth was likely to slow further as Beijing tries to restructure the economy away from exports and towards domestic consumption -- something the United States and other trading partners have long pressed China to do.
Tuesday's data showed net exports subtracted from 2011 growth while consumption contributed more than half.
Some analysts think China's first-quarter growth will be below 8% threshold seen as the minimum for assuring sufficient job creation.
"Further weakness lies ahead," Mark Williams, an analyst at Capital Economics, said before the fourth-quarter data was released.
"European demand for Chinese products has already slowed and is likely to remain subdued. The outlook for real estate construction -- a 10th of GDP -- is potentially an even greater concern."
Europe is China's top export market, and all signs point to much of the continent falling into recession in coming months, with no end in sight as governments push austerity programmes.
Mass ratings downgrades in the euro zone over the weekend and a breakdown in Greek bailout talks have added to financial market jitters.
New Year Skew
An early Lunar New Year holiday on January 23-24 probably skewed the fourth-quarter data and the effect will likely linger through the first three months of the year. Factories typically step up production to clear orders before the festive period, and then temporarily shut down as workers head home to visit family.
That means Q4 growth probably benefited from the surge in manufacturing, while first-quarter activity will be even slower.
"We are in a period where the early Chinese New Year is boosting activity ahead of the holiday, which is setting us up for a disappointment after," Ken Peng, an economist at BNP Paribas, said before the data release.
Peng sees China's annual economic growth slipping to 7.9% in the first quarter, the worst in three years.