World's No. 2 Economy Is Setting Itself Up for Solid 2013

Photo: AP

Following a year tainted by heightened economic uncertainty, the world's second largest economy is setting itself up for a positive 2013, say analysts, pointing to China's latest economic data and stellar equity market performance.

China's official manufacturing purchasing managers' index (PMI) released earlier this week, which tracks larger state-owned corporations, remained at a 7-month high of 50.6 in December, while the HSBC PMI, a private survey of smaller factories, rose to a 51.5 -- up from 50.5 in November.

Supported by the slew of upbeat economic data and improving investor sentiment, the benchmark Shanghai Composite rallied almost 15 percent last month, pushing the market into positive territory for 2012. The market ended the year up 3.2 percent, reversing a 22 percent loss in 2011.

"The economy looks to have stabilized reasonably nicely without a lot of extra stimulus – that sets China up for a solid start to 2013," Richard Yetsenga, Head of Global Markets Research at ANZ told CNBC on Wednesday.

Worries over possible overheating in the economy led Chinese policymakers to exercise caution with unleashing new stimulus to support growth in 2012. In September, Beijing approved over $150 billion in infrastructure spending – around one fourth of the total size of the stimulus package unveiled in 2008 to prop up the economy following the onset of the global financial crisis.

Nonetheless, China's economy has staged a recovery helped by a pickup in domestic demand, and is expected to grow in the mid 8-percent range in 2013 - levels not seen since the last quarter of 2011.

(Read More: Coming Soon: China's Growth Resurgence)

Stock Market Boom?

An improving economic outlook for the economy meanwhile has led to increased optimism over the prospects for the Chinese equity market, which was one of last year's worst performing markets in Asia.

"Our economists are forecasting above 8 percent growth this year, that is good enough for the stocks to have another rally (in 2013)," Steven Sun, Head of China Equity Strategy, HSBC said, forecasting 20 percent upside in the domestic A-share market over the next 12 months.

"Policymakers in Beijing still need to stay vigilant to consolidate that trend, as a result, we do expect a range of tax cuts and also a reserve requirement ratio cut before the (National) People's Congress in March," he added, referring to the key legislative session in which China's new leaders are set to be sworn in.

(Read More: Will 2013 Be the 'Break-Out' Year for China Stocks?)

Growth Risks Remain

Zhiwei Zhang, Chief China Economist at Nomura, however, believes China's growth trajectory remains uncertain due to a possible tightening of credit supply.

"The government has signaled in recent days that it is concerned about financial risks due to rapid credit growth and will likely tighten regulations," Zhang said.

On Friday, the People's Bank of China, the central bank, said it will concentrate on controlling risks in the financial system and ensure "steady and appropriate growth in credit."

"The regulators may tighten control on the quality and quantity of credit supply, particularly through non-bank channels such as trust loans which grew significantly in 2012. If this were to materialize, the current growth recovery cannot be sustained throughout 2013," he said.