China's course through the most testing economic conditions since the global financial crisis is getting bumpier, as data on Wednesday showed stuttering investment flows, tight credit and falling home prices coinciding with a difficult trade outlook.
The final rush of indicators ahead of the Lunar New Year holiday reinforced the view that economic growth will slowdown further in the first three months of 2012, a trend that gathered momentum at the end of 2011 and resulted in the slackest quarter of expansion in 2-1/2 years.
Pro-growth government policies applied so far should help avoid an outright hard landing, but the risk remains that the scale of the slowdown engineered domestically in the once-rocketing real estate sector and the size of the drop-off in external demand from debt-ridden Europe have been underestimated.
"Headline GDP growth shows a soft landing definitely, but if you look at some of the underlying sectors – particularly real estate investment – we see lots of vulnerabilities. It could be a pretty rough ride," said Ren Xianfang, senior China analyst at IHS Global Insight in Beijing.
"By the final quarter of last year I think the government started to lose its grip on the pace of the slowdown and that's largely because of the external shock," she added.
That shock has come in the form of both slower exports growth – which ended December at roughly a third of the year-on-year level seen in January – and capital outflows, which ended the year with the first quarterly outflow since 1998, calculations by Nomura analysts show.
Still, while trade and capital flows including foreign direct investment might be sagging, they are doing so from record highs.
Even so, the Ministry of Commerce warned in a regular news conference on Wednesday that the near-term outlook was difficult and that only a modest growth in trade was anticipated in the first quarter.
A number of indicators this week showed China's economic growth weakened in the fourth quarter, but it is the real estate sector that economists are scrutinizing most carefully to assess the scale of the domestic slowdown.
With Europe in danger of slipping into a recession and U.S. growth looking lacklustre, China's role in the global economy is magnified – particularly its ability to generate domestic demand that could absorb exports from struggling developed nations.
Real estate is the backbone of China's domestic growth story. Property investment was worth 13 per cent of total output in 2011 and it links some 40 major industrial sectors.
Data on Wednesday showed China's new home prices fell for the third straight month in December and may drop further as Beijing sticks to its campaign to bring housing costs back to levels that the government considers reasonable.
That followed data on Tuesday showing annual growth in China's real estate investment slowed in December to its weakest pace in a year.
"Today's report is consistent with the unambiguously deteriorating trends seen in property sales, construction, starts, and investments. The data just turned from bad to worse," Yao Wei, China economist at Société Générale in Hong Kong wrote in a note to clients.
"The economy as a whole has not felt much chill yet, but H1 2012 is going to be difficult not just for property developers. Contraction in sales and sharp deceleration in investments will send shock waves along the industry chain, which is expected to drag overall growth below the 8 per cent mark in H1," she said.
Intriguingly, tight monetary conditions revealed by the central bank's total social financing aggregate – the measure it developed to offer a clearer picture of money supply than simple M2 – underline credit constraints in the real economy.
Total social financing fell to 12.8 trillion yuan in 2011 from 13.9 trillion in 2010, even as an estimated 350 billion yuan was injected into the financial system after November's cut of 50 basis points to the ratio of deposits banks must hold as reserves.
China tightened policy to deflate the twin bubbles created in real estate and local government borrowing by the 4 trillion yuan stimulus package launched in 2008 to help the country through the global financial crisis.
The battle to bring those bubbles back under control is still being fought, even as the government faces another downturn that delivered a fourth successive quarter of slowing growth in October to December.
That battle is a key factor uniting economists in the view that even though China's economy will decelerate further in the months ahead, a cut to policy lending rates by the People's Bank of China is not on the cards.
"China started a deflating cycle last year and it will be very dangerous, very risky for them to end it prematurely because if they end it too early it will be an even larger macro economic risk for China going forward," said Mr. Ren of IHS.
Up to 200 basis points of bank reserve cuts are expected in 2012 by analysts polled recently by Reuters, as that helps keep money supply growth stable in the face of capital outflows.
Beijing is likely to stick to what Premier Wen Jiabao has called "fine-tuning" of economic policy settings to counter the downturn for now, rather than adopting more aggressive measures such as a interest rate cuts.
That leaves the main area of uncertainty for economists the question of how sharp the slowdown in GDP growth will be in the first quarter of 2012. Many expect the next 12 months to be the most sluggish growth for China in a decade.
The most bearish call in the latest Reuters poll is Deutsche Bank's 7.3 per cent. That's too steep for many and an unfathomable call to the likes of Ting Lu, Hong Kong-based China economist at Bank of America/Merrill Lynch.
A fall to there from 8.9 per cent in the fourth quarter implies a decline wiping some 6 percentage points off growth at an annualized rate that would leave the economy expanding at barely 3 per cent.
"That's just not going to happen," Ms. Lu said. "I think the chance of growth slowing to below 8 per cent in the first quarter is very low. Calls below that are just too pessimistic. There's a slowdown yes, but not that dramatic."