While China's growth rate reached 9.6 percent in the second quarter, but fell short of market expectations, which predicted growth within the 10.5 percent to 11 percent range. The country's economy is still said to be overheating and may run into trouble, an economist with Morgan Stanley said in a report issued on Tuesday.
"Chinese economic activity is still expanding at a torrid and unsustainable pace," Stephen Roach, Morgan Stanley's chief economist, wrote in a report entitled Taming the Dragon.
"The nation's authorities cannot afford to ease off on their campaign of policy restraint. If they do, an overheated Chinese economy runs the serious risk of a destabilizing hard landing," the report said said.
Roach said a lower than expected second quarter growth in China's GDP is the source of this confusion.
In addition, China's growth problems have never been accurately reflected in its GDP statistics, the report added.
Roach said recent trends in China's industrial sector tell a very different story than the country's GDP statistics.
Growth of China's industrial output reached 16.2 percent last month, down only marginally from peak comparisons of 19.4 percent in the first two months of the year, and well above the 10 percent trend of the past 10 years, Roach said.
"In my view, the industrial output comparison needs to move into the 8 percent to 10 percent zone -- and then stay there for at least six months -- before a legitimate soft landing can be declared," he said. "From that point of view, China's slowdown is, at best, only about 25 percent complete."
Other economic data offer mixed signals in gauging progress on the China slowdown front.
Roach said the most encouraging trend is in fixed investment -- a stunning deceleration peak growth rates of 53 percent in January and February of the year to 18.5 percent in May. While bank lending growth has modera-ted from 20 percent in March to 16.3 percent in June, it is still well above the 10 percent to 12 percent trend line, he said.
Yet there is still a significant risk that world financial markets will prepare for a "hard landing," in China, as shown in a 19 percent decline since January this year in the "H shares" of Chinese enterprises traded in Hong Kong, Roach said.
He added that China is now facing a fork in its long road to prosperity.
"There is too much at stake for the `Dragon' to take the wrong turn," he wrote in his report.
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