For nearly two years, China’s turbocharged economy has raced ahead with the aid of a huge government stimulus program and aggressive lending by state-run banks.
However, a growing number of economists now worry that China — the world’s fastest growing economy and a pillar of strength during the global financial crisis — could be stalled next year by soaring inflation, mounting government debt and asset bubbles.
Two credit ratings agencies, Moody’s and Fitch Ratings, say China is still poised for growth, yet they have also recently warned about hidden risks in its banking system. Fitch even hinted at the possibility of another wave of non-performing loans tied to the property market.
In the late 1990s and early this decade, the Chinese government was forced to bail out and recapitalize these same state-run banks because a soaring number of bad loans had left them nearly insolvent.
Those banks are much stronger now, after a series of record public stock offerings in recent years that have raised billions of dollars from global investors.
However, last week, an analyst at the Royal Bank of Scotland advised clients to hedge against the risk that a flood of cash into China, coupled with soaring inflation, could result in a “day of reckoning.”
A sharp slowdown in China, which is growing at an annual rate of about 10 percent, would be a serious blow to the global economy since China’s voracious demand for natural resources is helping to prop up growth in Asia and South America, even as the US and the EU struggle.
And because China is a major holder of US Treasury debt and a major destination for US investment in recent years, any slowdown would also hurt US companies.
Aware of the risks, Beijing has moved recently to tame its domestic growth and rein in soaring food and housing prices by raising interest rates, tightening regulations on property sales and restricting lending.
At the end of the Central Economic Work Conference, a high-level annual economic policy meeting that concluded on Sunday, Beijing promised to combat inflation and stabilize the economy. Those pledges came just days after the central bank ordered banks to set aside larger capital reserves in a bid to slow lending, the sixth time it has done so this year. And the government reported on Saturday that the consumer price index had climbed 5.1 percent last month, the sharpest rise in nearly three years.
Analysts say more tightening measures are expected in the coming months, but that the challenges are mounting.
“There are so many moving pieces,” said Qu Hongbin (屈宏斌), the chief China economist for HSBC in Hong Kong. “It wouldn’t be honest to say things aren’t complicated.”
Optimists say China has been adept at steering the right economic course over the last decade, ramping up growth when needed and tamping it down when things get too hot.
However, this time, Beijing is not just struggling with inflation, it is also trying to restructure its economy away from dependence on exports and toward domestic consumption in the hope of creating more balanced and sustainable growth, analysts say.
China is also facing mounting international pressure to let the yuan rise in value. Some trading partners insist China is keeping its currency artificially low to give Chinese exporters a competitive advantage.
Beijing contends that raising the value of its currency would hurt coastal factories that operate on thin profit margins, forcing them to lay off millions of workers.