Will China's boom end in a crash?

After a decade with the economic throttle wide open, China's growth is overheating, and the country's leaders are grappling with ways to slow the expansion's breakneck pace without choking it off.

Being able to apply the economic brakes to achieve what is known as a soft landing after a spectacular boom is a difficult challenge for any country. It may be doubly so for Beijing's leaders, who are fairly new to the market economy game and who lack many of the finely honed policy tools available to central bankers in the West and Japan.

Indeed, economists are split over whether a soft landing or a hard landing is more likely for China.

Prime Minister Wen Jiabao (溫家寶) has sought to assure foreign investors that China is taking steps to achieve a soft landing. During a visit to Brussels last Thursday, Wen said his government would pursue "forceful" measures to "reduce the speed" of the economy -- "but not a sudden braking."

He promised to slow increases in the money supply and in bank lending that have fueled the recent acceleration in growth, but said that a loosening of the peg of China's currency to the dollar would have to wait for banking reforms.

Much is riding on Beijing's efforts. The global recovery now depends on China as one of its main engines, along with the US. A hard landing -- a steep decline in economic growth leading to higher urban unemployment and a sharp drop in imports -- would rattle economies around the world.

But it would probably bear little resemblance to the last economic crisis in the region, the cascade of financial and currency collapses that swept through many East Asian economies (but not China) in 1997 and 1998, a memory still fresh and painful for many investors.

If China runs into serious trouble, experts say this would be likely to take months to unfold rather than present a relatively rapid financial collapse, as happened in Thailand, Indonesia and South Korea nearly seven years ago.

"The problem is more of a long-term affair," said Desmond Supple, managing director of Asian research at Barclays Capital. "If we get a hard landing, it wouldn't be anything like" the last Asian crisis.

A soft landing is more probable, according to the IMF and some investment banks, with growth gradually slowing to a bit more than 7 percent annually from the 9.7 percent annual pace recorded in 2004's first quarter.

Seven percent a year would still be a scorching growth rate in most economies. But Chinese experts say that is the minimum the country needs to keep urban unemployment from worsening, as millions of migrants from rural areas pour into cities, straining the social fabric and possibly fertilizing the seeds of political unrest.

"We don't think a really hard landing is a likely scenario" for the economy as a whole, said Huang Yiping, a Citigroup economist in Hong Kong. But there may be crashes in a small number of industries where over-investment has been greatest, he said, and in particular, "You probably will see a very, very hard landing in steel investment."

The central bank has raised bank reserve requirements twice in two months to discourage lending, and is strongly hinting at its first interest rate increase since 1995.

China's most important step, but also the hardest to fine-tune to avoid overdoing it, lies in sending police and prosecutors after local officials who have gone on pursuing grandiose projects despite warnings since June from senior economic officials in Beijing. Because China lacks functioning bankruptcy laws and foreclosure proceedings, the government must rely on criminal fraud investigations to deal with wayward companies, said Andy Xie (謝國忠), a Morgan Stanley economist.