SLOW DOWN: China prepares for a sub-7 percent growth in 2012 (XINHUA)

The likelihood of double-digit growth has dissolved in China, and the risk of a sub-7 percent growth rate in one of the quarters next year has increased meaningfully.

China's economic growth has slowed from 9.1 percent year on year in the third quarter of 2011 to around 8.2 percent year on year in the fourth quarter of 2011.

Industrial production growth decelerated in November to the lowest reading since the first half of 2009, and electricity production growth is growing at single digits for the first time this year. For the first time since the fourth quarter of 2008, manufacturing and non-manufacturing PMI (Purchasing Managers Index) simultaneously slipped into contraction in November.

Growth is expected to come in below 7.5 percent year on year in the first quarter of 2012 – the first sub-8 percent print since mid-2009. Apart from the growing likelihood of an external shock, if investment falls, China is in serious trouble because the rest of the economy will need to grow twice as fast to compensate, and that isn't a viable alternative in 2012. Investment growth may decelerate, but a slump is unlikely. Investment-to-GDP ratios are still low across China, with sizeable capacity in the central and western regions.

Worryingly, around a quarter of the recent investment surge has siphoned to real estate. Since 2004, fixed asset investment in real estate has increased by over 20 percent per annum, leading to house prices doubling in 35 cities. Then, quite dramatically, investment in property peaked in 2010 – growing at 38 percent in 2010. The Chinese Government has put in place a plethora of policy initiatives to engineer a deceleration of prices and siphon speculative forces from the sector. As a result, 15 (out of 37) cities saw month-on-month price declines in November. Looking ahead, prices will fall further as developers try to boost sales. China Vanke Co. Ltd., the largest property developer in China, suffered a 36-percent year-on-year fall in sales during November – the fourth consecutive and largest fall so far in 2011. Looking further ahead, more restrictive regulations has forced many potential homebuyers out of the market, which adds another layer to demand, which is structurally underpinned by rapid urbanization, modernization and growing incomes. China has around 225 million urban households, but around 150 million homes. Another 100 million people will join cities over the next two decades. However, any miscalculation could result in anger. Many homeowners have their life savings in the property, which are shrinking – especially in buildings where developers are offering steep discounts.