China Stimulus Bearing Fruit

China's stimulus efforts kicked in late last year, boosting production and consumer spending, and helping full-year economic growth come close to the government's target.

Industrial output and retail sales for December beat the median estimates of economists surveyed by Bloomberg News. While not enough to prevent China from recording the weakest annual expansion since 1990, the gains helped ensure gross domestic product growth of 7.4 percent for 2014—in line with Premier Li Keqiang's target.

Policy makers are projected to add to measures that so far have featured an acceleration in investment approvals and the first interest-rate cut in two years. Ensuring a soft landing for China would help a global economy contending with weakness that Tuesday spurred the International Monetary Fund's steepest cut to its world growth outlook in three years.

“There is growing evidence that the Chinese economy is adjusting and achieving some so-called 'rebalancing,'” said Jim O'Neill, the former Goldman Sachs Group Inc. chief economist who coined the BRIC acronym. “Given that marginal events in China are the number-one economic issue for the world economy, any sign of China moving in the right direction of rebalancing has to be extremely helpful.”

The Shanghai Composite Index of stocks closed 1.8 percent higher after the releases.

GDP climbed 7.3 percent in the three months through December from a year earlier, compared with the median estimate of 7.2 percent. Bloomberg's monthly GDP tracker rose to 7.07 percent in December, according to an initial reading, snapping four months of sub-7 percent levels.

China's economic structure continued a gradual adjustment, with consumption contributing 51.2 percent of the GDP growth last year, up 3 percentage points from a year earlier. Services made up 48.2 percent of the economy, up 1.3 percentage points.

President Xi Jinping is pushing pro-market policies to boost new economic drivers as China enters a “new normal,” a phrase he has adopted to reflect slower, more-sustainable expansion. The government had targeted a GDP jump of about 7.5 percent in 2014. The last time the full-year expansion missed the state target was 1998, amid the Asian financial crisis.

A commentary by state-run Xinhua News Agency said it was unsurprising that China's “miraculous, breakneck growth is over” and that people should “get over it.” Much of the pain was self-inflicted by a government pushing ahead with market-driven change on all fronts, it said.

Industrial Output

Industrial output, which has been helped by overseas demand, climbed 7.9 percent in December from a year earlier, and retail sales increased 11.9 percent.

Reflecting officials' efforts to rein in overcapacity in the world's second-largest economy, fixed-asset investment excluding rural areas expanded 15.7 percent last year, down from 19.6 percent the previous year. That contributed to a slowdown in quarterly GDP growth, to 1.5 percent from 1.9 percent, in July-to-September.

Policy makers' efforts to rein in the property market helped trigger a 14.4 percent tumble in newly started residential buildings, measured by floor space. There was some sign of a real-estate stabilization in December, as new home sales saw the first year-on-year advance in 12 months.

“Growth momentum eased in the fourth quarter from the previous three months due to property-related weakness,” said Wang Tao, chief China economist at UBS Group AG in Hong Kong. “Property starts deepened their decline, which also dragged down heavy industry and related investment.”

More infrastructure spending, a bigger fiscal deficit, and easier monetary policy will help contain risk and reduce financing costs, Tao said.

A third consecutive annual decline in the nation's working-age population—people aged 16 to 59 years—was another drag. The labor pool shrank by 3.71 million last year.

The difference between nominal and real GDP growth—a gauge of price changes across the economy—narrowed to 0.8 percent last year, according to data compiled by Bloomberg, from more than 8 percent in 2011. The shrinking underscores factory-gate deflation and moderating consumer price increases.

“Given that inflation remains so low, there is also scope for additional policy stimulus,” said O'Neill, who is now a Bloomberg View columnist.

Industry's Role

Secondary industry—made up of activities including manufacturing and construction—contributed 3 percentage points to growth, compared with 3.8 percentage point from services, “reflecting an undergoing structural change,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong.

Shortly after China released its data, the IMF published updated global forecasts, showing that the world economy will grow 3.5 percent in 2015, down from a 3.8 percent pace projected in October. It upgraded its forecast for the U.S. to 3.6 percent growth in 2015, from 3.1 percent in October, and lowered China's to 6.8 percent, down 0.3 percentage point.

Policy makers in China will probably “put greater weight on reducing vulnerabilities from recent rapid credit and investment growth, and hence the forecast assumes less of a policy response to the underlying moderation,” the fund said.

–With assistance from Ran Li and Xin Zhou in Beijing.

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