Weakness in numbers

China's present condition can't be summed up in a few tenths of a percentage point. True, judged by the headlines, GDP growth of 8.1 per cent in the first quarter of 2012 was a miss. Economists polled by Reuters expected 8.3 per cent. Investors shouldn't overthink it: growth is the least of China's three big worries.

The slowdown is real, but well flagged. Premier Wen Jiabao set a target of 7.5 per cent GDP growth for 2012, compared with last year's realised 9.2 per cent. Against that, the current reading is hardly shabby, and may improve. Getting banks to lend more is one recourse that has already begun, with loans reaching one trillion yuan in March. There are signs things are already ticking up - such as the inching up of electrical production in March, often touted as a 'more reliable' measure of growth than GDP. If investors want to worry about something, they should start with politics. The mysterious ouster of high-profile Chongqing party chief Bo Xilai, and the arrest of his wife on murder charges, suggests a rising political risk premium as China nears next year's leadership change. There's no sign of a political breakdown, but increased anxiety at the top could slow big reforms on major issues, such as opening up restricted investment sectors or liberalising interest rates.

Fretters should also have an eye on the financial system. As with GDP, numbers mislead. China's banks reported non-performing loans of just over one per cent of their total books in 2011. But that's unsustainable, even if accurate. The banking system is built on distortions that promote misallocation of capital, with lending guided more by policy, collateral levels and implicit government guarantees than by considerations of risk and return.

Not that GDP growth won't present China with some thorny issues in 2012. Policymakers will soon have to decide, for example, whether they are happy to tolerate the inflationary pressures that come with using bank lending to stimulate the economy. And a political or financial shock would quickly make itself felt in the GDP figures. But the more complex China's situation gets, the less useful one big number becomes.