China GDP beats expectations but debt risks loom

BEIJING - China's economy grew a faster-than-expected 6.8 percent in the fourth quarter, boosted by higher government spending and record bank lending, giving it a solid tailwind heading into what is expected to be a turbulent year. But Beijing's decision to raise spending to meet its official growth target could exact a high price, as policymakers grapple with financial risks created by an explosive growth in debt. The fourth-quarter figure is the first time in two years that the world's second-largest economy has shown an uptick in growth, but this year it faces further pressure to cool its housing market, the impact of government efforts at structural reforms, and a potentially testy relationship with a new US administration. "We do not expect this (Q4 GDP) rebound to extend far into 2017, when a slowdown in the property market and steps to address supply shortages in the commodity sector ought to drag again on demand and output," said Tom Rafferty, regional China manager for the Economist Intelligence Unit. The economy expanded 6.7 percent in 2016, the National Bureau of Statistics said on Friday, roughly in the middle of the government's 6.5-7 percent growth target but still the slowest pace in 26 years. Economists polled by Reuters had expected China would report 6.7 percent growth for both the fourth quarter and the full year. Housing helped prop up growth again in the fourth quarter, with property investment rising by 11.1 percent in December from 5.7 percent in November, even as house prices showed signs of further cooling in some major cities. Consumer spending was also strong, with retail sales in December rising at their fastest pace in a year on stronger sales of cars and cosmetics. STABILITY A PRIORITY Fixed asset investment grew 8.1 percent, the slowest pace since 1999, as investment by private firms slowed again in December on a monthly basis. Private sector fixed asset investment fell to 4.07 percent from 4.93 percent in November, according to Reuters calculations based on statistics bureau data. Consumption contributed the bulk of growth last year, but income growth didn't pick up and a measure of China's income inequality rose slightly last year, the statistics bureau said on Friday. Amid signs of stabilization, policy sources told Reuters that China's leaders will lower their economic growth target to around 6.5 percent this year, giving them more room to push reforms to contain debt risks. They will not want to let growth fall too sharply, however, ahead of a key party meeting in the autumn when a new generation of leaders will be picked. "Economic stability is always important but will be an even higher priority ahead of the 19th Party Congress that will take place in the fall," said Tim Condon, Singapore-based economist at ING. RISKS INCREASE China's debt to GDP ratio rose to 277 percent at the end of 2016 from 254 percent the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said in a note.