By Langi Chiang and Koh Gui Qing
BEIJING (Reuters) - China's economy expanded at its weakest pace in 2-1/2 years in the latest quarter, with the sagging real estate and export sectors heralding a sharper slowdown in coming months and fresh pro-growth measures from the government.
Growth of 8.9 percent over a year earlier was slightly stronger than the 8.7 percent forecast by economists in a Reuters poll, but the data on Tuesday raised concerns about the immediate outlook and how much support China can offer a struggling global economy.
Gross domestic output rose just 2 percent from the previous quarter, suggesting to some economists that underlying momentum is slowing more rapidly than headline data implies.
A near 40 percent plunge in the annual pace of property investment in December versus November's rate underscored risks to China's domestic demand even as it is trying to cope with those emanating from debt-ridden Europe -- China's biggest export market.
"It indicates that in Q1 2012 the numbers will be very unpleasant. Policy easing will continue," said Yao Wei, an economist at Societe Generale in Hong Kong, who forecasts growth slowing to 8.3 percent in the first three months of 2012.
"It's a very significant slowdown already in China," she said.
Growth for all of 2011 slipped to 9.2 percent, a pace last seen in 2009 during the global financial crisis, from 10.4 percent in 2010.
Beijing is likely to stick to what Premier Wen Jiabao has called "fine-tuning" of economic policy settings to counter the downturn for now, rather than adopting more aggressive measures such as a cut in interest rates.
December's retail sales growth of 18.1 percent on the year was well above forecasts and industrial production also staged a slight uptick in real terms in December versus November.
"On policy, we expect Beijing will read both positive and negative messages from the Q4 data and further adjust their policies," Ting Lu, China economist at Bank of America/Merrill Lynch in Hong Kong wrote in a note to clients.
"Simply put, Beijing will continue its policy easing which was started in mid-October, though we should not expect a big-bang stimulus," he added.
China's policymakers have unveiled a series of policy tweaks from tax breaks for small firms, to a cut in the proportion of deposits the country's banks must hold as reserves in a bid to boost corporate credit and money supply.
A cut in the required reserve ratio (RRR) in November -- to 21 percent from a record 21.5 percent for big banks -- was the first in three years.
Analysts polled recently by Reuters forecast another 200 basis points of cuts in 2012, with many banking on one in the run-up to next week's Lunar New Year holiday to ease anticipated liquidity squeezes as demand for cash soars.
The pressure for another RRR cut has built as capital has started to flow out of China after years of inflows that allowed the country to amass the world's biggest store of foreign exchange reserves worth $3.18 trillion.
Reducing RRR keeps money supply -- which senior Chinese think-tank sources tell Reuters is targeted for 14 percent growth in 2012 -- stable in the face of capital outflows.
INVESTORS EXPECT POLICY EASING
Asian shares, the euro, industrial metals and commodity-linked currencies all rose as the data soothed investor worries that the euro zone debt crisis is dragging dangerously on the world's second-biggest economy.
Meanwhile, the benchmark Shanghai Composite Index <.SSEC> rallied around 3 percent, reversing a 1.7-percent fall a day earlier, as investors priced in further policy easing and hopes that China would quicken the pace of approval for more foreign investors to trade Chinese stocks.
With Europe in danger of slipping into a recession and U.S. growth looking lackluster, China's role in the global economy is magnified.
Although economists widely expect China's 2012 growth will be the weakest in a decade, a more pronounced slowdown would put a major drag on already shaky global growth.
The fourth-quarter growth rate was the slowest pace since the second quarter of 2009, when the global economy stumbled out of a deep recession. It also marked the fourth straight quarter in which growth had slowed down.
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Ma Jiantang, the head of China's statistics agency, said China's economic growth was likely to slow further as Beijing tries to restructure the economy away from exports and towards domestic consumption -- something the United States and other trading partners have long pressed China to do.
Tuesday's data showed net exports subtracted from 2011 growth while consumption contributed more than half.
Annual growth in property investment at 12.3 percent in December, marked a sharp slowdown from November's 20.2 percent pace, a worrying signal for a sector worth some 13 percent of total economic output.
Housing investment dropped precipitously in December, and many property developers have warned that 2012 looks grim.
A booming housing market helped drive China's explosive growth in recent years, but Beijing has tried to cool prices in hopes of avoiding a devastating bubble and bust.
A modest housing market slowdown would be a welcome development, but a crash would be catastrophic, both for China and its trading partners around the world.
Some analysts think China's first-quarter growth will be below 8 percent threshold seen as the minimum for assuring sufficient job creation.
Europe is China's top export market, and all signs point to much of the continent falling into recession in coming months, with no end in sight as governments push austerity programs.
Mass ratings downgrades in the euro zone over the weekend and a breakdown in Greek bailout talks have added to financial market jitters.
An early Lunar New Year holiday on January 23-24 probably skewed the fourth-quarter data and the effect will likely linger through the first three months of the year.
Factories typically step up production to clear orders before the festive period, and then temporarily shut down as workers head home to visit family.
That means fourth-quarter growth probably benefited from the surge in manufacturing, while first-quarter activity will be even slower.
"What's happened in December is to some extent the pre-Lunar New Year bounce in activity and prices. What we're seeing in December is the seasonal effect. If it is just a seasonal effect then obviously what that means is January-February will be weaker," Michael Spencer, Deutsche Bank's Hong Kong-based chief economist in the Asia Pacific said.
"It's fair to say the economy is holding up better but it's hard to say if that's just a statistical artifact of the short calendar," he added. ($1=6.31 yuan)
(Additional reporting by China economics team: Writing by Nick Edwards and Emily Kaiser; Editing by Kim Coghill and Neil Fullick)