China reports 7.7% GDP in 4Q13

Here's what puzzled analysts.

According to DBS, China’s 4Q13 real GDP growth came in at 7.7%, concluding full-year growth at 7.7%. Gross capital formation contributed 54.4% to growth in 2013 (47.1% in 2012), the highest since 2009. Net exports of goods and services made a negative contribution of 4.4% (-2.1% in 2012). Final consumption made up the remaining 50.0% (55.0% in 2012).

Here's more:

In nominal terms, FAI grew only 19.6% in 2013, versus 20.6% in 2012. Its weakness is consistent with slower M2 and loan growth of 13.6% and 14.1% respectively (versus 13.8% and 15.0% respectively in 2012).

Retail sales growth also slowed to just 11.4% in 2013 versus 14.3% in 2012 due to the growing intensity of the frugality program. Meanwhile, the merchandise trade balance expanded to USD 261bn in 2013 from USD 230bn in 2012.

Full-year trade numbers should be taken with a grain of salt as exports might have been inflated by over-invoicing for the most part of 1H13. This means the “appropriate” GDP growth rate might have been slightly lower than the reported 7.7%.

What’s puzzling is that annual real GDP growth held steady despite falling FAI and retail sales growth (in nominal terms). We suspect the GDP deflator may have something to do with it.

The headline GDP growth number reveals little about the actual state of affairs such as rising risk premiums and attenuating industrial over-capacity because headline growth of 7.7% in 2013 was the same as that in 2012. The economy is projected to grow marginally faster at 7.8% in 2014.

This year, the pacing and execution of reforms will likely be gradual as the leadership grapples with unforeseen circumstances and numerous challenges.