Here's why China can't be too happy with rebounds yet

The 7.9% real GDP growth has lots of potholes.

According to Nomura, China's real GDP growth rebounded to 7.9% y-o-y in Q4 2012 from 7.4% in Q3, stronger than the market expected (Consensus: 7.8%) but slightly below the firm's expectation of 8.0%.

This took full-year 2012 GDP growth to 7.8%. Growth momentum picked up further in December, as industrial production growth improved to 10.3% y-o-y in December from 10.1% in November (Consensus: 10.2% y-o-y; Nomura: 10.6%), and the flash January MNI China business sentiment indicator – which has a strong positive correlation with the official PMI – rose to 54.94 from 52.22 in December.

Retail sales growth rose to 15.2% y-o-y from 14.9% in November (Consensus: 15.1%; Nomura: 15.6%), although the rise was mostly driven by inflation.

Here's more from Nomura:

However, there are signs of weakness on the investment side. Total fixed asset investment (FAI) growth slowed slightly to 20.6% y-o-y (ytd) in December from 20.7% in November (Consensus: 20.7% y-o-y; Nomura: 20.8%).

FAI growth in the manufacturing industry and property sector both slowed to 22.0% and 16.2%, respectively, from 22.8% and 16.7%. More importantly, planned investment growth for newly started projects – which is a leading indicator of FAI growth – slowed after rising for eight consecutive months.

The property sector also showed signs of weakness. Growth of new housing starts and land purchased by developers both fell in volume terms, to -7.3% y-o-y (ytd) and -19.5%, respectively, in December from -7.2% and -14.8% in November.

Growth of property sales also slowed in volume terms, to 1.8% y-o-y (ytd) from 2.4%, which may be due to the rebound of housing prices – growth of sales rose in value terms to 10.0% from 9.1%.

We believe monetary policy will shift away from the very loose stance held in H2 2012. Growth rebounded in Q4 and CPI inflation rose in December (2.5% y-o-y), ahead of market expectations.

There has been more negative news about shadow banking activity in recent months, with the People‟s Bank of China (PBoC) likely putting more focus on controlling inflation and financial risks.

We continue to believe that the PBoC will not alter interest rates or the reserve requirement ratio in H1. If inflation picks up in H2 to above 3.5%, as we expect, then the PBoC will likely hike rates twice – our forecast is for one 25bp hike in Q3 and one in Q4.