China's economy slows to a "just right" 8.9% growth rate in the fourth quarter

01/17/2012 1:15 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Is China the new Goldilocks? Global stocks markets certainly think so. The growth rate for fourth quarter GDP announced today came in just right.

China’s economy slowed with GDP climbing at an 8.9% rate from the fourth quarter of 2010. That marked a continued deceleration in growth. For the year China’s economy grew at a 9.2% rate after growing by 10.4% in 2010. Each quarter this year has shown a slowdown from 9.7% year-on-year growth in the first quarter to 9.5% growth in the second quarter to 9.1% growth in the third quarter and now to 8.9% growth.

In 2011 China has tried to slow its economy in order to fight inflation. The trend shows that China’s efforts are working. In December inflation grew at a 4.1% annual rate, down from a high of 6.5% in July, and just slightly above the government’s 4% target.

All this has led investors to believe that the People’s Bank of China will accelerate its so-far modest moves to loosen monetary policy. In December the central bank cut its bank reserve requirements for the first time since 2008 and in December new loans from banks grew by 14% from November. The most optimistic of analysts see bank reserve requirements falling to 19% from the current 21% by the end of 2012 and the benchmark lending rate dropping to near 6% from the current 6.56%. An expansion in the money supply, especially an expansion certified by cuts in the actual benchmark interest rate, would put an end to China’s bear market in stocks and usher in a sustained rally.

Or at least that’s the hope.

If the slowdown in the economy doesn’t go to far and produce a hard landing with growth in China dipping to 7% or less. The fear here is that the government’s efforts to slow the economy combined with a slowdown in the global economy as a result of the euro debt crisis will slam on the brakes so hard that recent efforts to stimulate growth won’t be enough.

But today’s drop in growth to 8.9% is reassuring on this front. Growth is slowing but not too much and the slowdown may wind up being just right. The median prediction by economists surveyed by Bloomberg called for a drop to 8.7% in today’s figures.

Digging down a level in the data also showed a slowdown that looked just right. For example, industrial production grew by 12.8% in December from December 2010, above the 12.3% prediction by economists and above the 12.4% growth rate in November. Fixed-asset investment—which includes the kind of real estate investment that the government would like to slow but not kill—grew by 23.8% in 2011, less than the 24.1% estimated by economists. Retail sales, which the government is counting on to balance the decline in real estate investment—rose at an 18.1% rate in December from December 2010.

In Hong Kong the Hang Seng Index rose 3.3% on the day and in Shanghai the Shanghai Composite was up 4.2%.

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