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The final quarter of 2016 capped the year with a slight acceleration in growth, despite apparent policy tightening. Though slower than 2015, growth of 6.8% in the final quarter saw 2016 growth come in at 6.7%, well within the tolerance of the official target.

Compared to our expectations before the year began, when policy discussions were full of talk about reducing spare capacity and containing excesses, it is fair to say this has come as a surprise.

“Old economy” has accelerated

Though a positive surprise in terms of growth, it is not an unalloyed good. A breakdown of GDP shows that growth was supported in the final quarter by investment, as consumption’s contribution declined. On an industry basis, the primary sector, or “Old China”, has been accelerating for much of the year. Neither of these facts fits with the supposed rebalancing of the economy.

One potential positive here has been the growing contribution of the tertiary sector, but even here it seems likely that this is more cloud than silver lining, given the booming property market.

Investment has been state-driven

Investment of course is not always wasteful, and even in a service-driven economy it is an important part of the growth mix. But in China’s case, the data has shown that for much of the year it has been the state, rather than the private sector, driving the investment figures.

It is true that in the final quarter of the year, investment growth appears to have been focused in property and manufacturing, rather than state-led infrastructure.

It is also true that some of this is likely to be productive investment; rising global and producer prices should prompt investment by manufacturers. But the revival here also coincides with an easing of production restrictions in coal. If spare capacity reduction efforts are made in earnest, we have doubts over the sustainability of this growth.

Modest growth slowdown likely in 2017

Looking ahead, a slowdown in 2017 seems likely, but its scope will be modest. Credit growth in China has only recently slowed, and even then only marginally. It will be at least another quarter before this feeds through to activity.

We are sceptical that real cuts to spare capacity industries will be undertaken ahead of the Party congress towards the end of 2017, given the importance of the event to President Xi.

That we expect a slowdown at all reflects recent policymaker statements on the need for stability over growth, but we have heard these noises before and seen only the slightest of course corrections.