Potential growth has likely slowed to 7.0-7.5%, while we expect inflation to exceed consensus levels in 2013.
· Growth of China's working-age population (aged15-59) turned negative in 2012 (-0.6% y-o-y) for the first time in over two decades, according to the National Bureau of Statistics. Negative growth of this demographic was generally not expected so soon (according to the UN, China’s working-age population was estimated to peak in 2015).
· The fall in working-age population is consistent with our view that the labour market has turned structurally tight and that potential GDP growth has slowed to 7.0-7.5%. This also helps reinforce our view that CPI inflation should rise through 2013, to 4.4% y-o-y in H2 as GDP growth rises to 8.1% in H1 and the output gap widens.
· As inflation rises and shadow banking risks increase, we expect credit growth to fall in H1 and the central bank to hike interest rates twice in H2. We are therefore cautious on the growth outlook and expect it to slow to 7.3% y-o-y in H2 from 8.1% in H1.
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