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Why China doesn't face a hard landing in Year of the Horse

Thursday, 30 Jan 2014 | 9:13 PM ET
Horse and dragon lanterns are illuminated on Panlong River on January 26, 2014 in Kunming, China.
ChinaFotoPress | Getty Images
Horse and dragon lanterns are illuminated on Panlong River on January 26, 2014 in Kunming, China.

As the world's second-biggest economy rings in the Year of the Horse, global financial group REORIENT says there are clear reasons why China won't face a hard landing despite the re-emergence of concerns.

The potential for a Chinese hard landing has been an ongoing concern in recent years, as the country's policy makers attempt the difficult task of steering the economy from decades of double-digit investment-powered growth to more stable levels fueled by consumption.

And in recent weeks, a broader selloff in emerging markets combined with a string of disappointing data points and renewed fears over China's burgeoning credit bubble, have stoked bearish sentiment over the risk an impending crash.

(Read More: CNBC Explains: Chinese shadow banking crisis)

However, in REORIENT's China Compass report published Thursday, analysts outlined several reasons why they see China avoiding such a scenario.

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Firstly, earnings at industrial firms rose 12.2 percent in 2013, to surpass 6 trillion renminbi (around $1 trillion). This is an encouraging figure, the firm said, considering the tighter credit supply implemented in 2013, and policy makers' push to upgrade the secondary sector (ie. production and construction firms).

Secondly, tension in the interbank funding market has subsided following calming measures from China's central bank, REORIENT pointed out.

In recent weeks, the People's Bank of China provided emergency cash injections to support commercial banks and settle market anxiety, which heightened last June when the seven-day repo rate spiked above 10 percent, a record high.

(Read More: China banking worries 'way overblown': Wilbur Ross)

Thirdly, REORIENT highlighted China's fourth quarter gross domestic product (GDP) figure, which earlier this month showed China's economy expanded by 7.7 percent year on year, slightly above expectations of 7.6 percent.

This uptick was due to a rise in consumption from 45 percent in the first three quarters of the year to 50 percent for the full year, the analysts said, an encouraging sign that economic growth remained at healthy levels.

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Meanwhile, the fourth reason referred to China's frothy property market, where rocketing prices and the now infamous 'ghost cities' have fueled speculation of a bubble.

(Read More: China's red-hot housing market shows signs of easing)

But REORIENT pointed out recent reports have shown that property prices in China's largest cities of Beijing, Shanghai, Guangzhou and Shenzhen peaked at the end of last year.

"With average housing prices up 20.8 percent from a year ago, the increase in December is lower than November's 21.2 percent, and the trend is firmly heading south as judged by the shrinking month-on-month changes across the board," it said.

Fifthly, REORIENT alluded to the fact that credit and money supply growth in China is falling, which should help calm fears that the country's credit addiction will get out of control. Aggregate financing stayed on par with November last month, they said, an unusual development considering it normally surges at the end of a quarter.

(Read More: Is China really running out of cash?)

Finally, capital inflows remained strong at the end of last year, jumping $50 billion a month during the final quarter to a record high of $3.82 trillion, said the financial services group.

Strong capital inflows are positive for an economy as they help fund a country's current account and support its currency.

By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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