Robust Chinese growth and inflation data released a few weeks ago raised widespread concerns about the outlook for the country’s economy in the Year of the Rabbit. The Shanghai stock market has bounced back in recent sessions – but should investors still be worried?

Carl Weinberg, chief economist at High Frequency Economics, says: “Have no fear – China’s economy is not overheating.

“One has only to review the history of China’s modernisation to see that GDP has averaged 9.7 per cent growth per year over the last 30 years. Fourth-quarter GDP was trivially faster than China’s demonstrated sustainable growth rate.

“Furthermore, over that same 30-year period, consumer price increases averaged 4.6 per cent, which is just where the year-over-year rise in the CPI for December was reported.

“China need not raise interest rates to fight current inflation, but a rate hike may be coming anyway in the longer-term battle against runaway money and credit growth.

“The authorities do not want to see demand throttled by monetary tightening; the People’s Bank of China only wants to stabilise credit growth near end-of year levels so as to ensure economic prosperity.”

Mark Williams at Capital Economics is also fairly relaxed about the threat of overheating. “China’s economy ended 2010 with momentum strong, but this is likely to slow in 2011 as real estate construction spending weakens and stimulus projects reach completion,” he says.

“With inflation also now steadying, there is likely to be little need for policymakers to implement significant policy tightening.

“A wave of property entering the market over the next few months is likely to lead to a slowdown in construction activity,” he says. “Many stimulus-linked infrastructure projects are also now winding down.

“As a result, the pace of GDP growth is likely to slow over coming quarters whatever policy steps are now taken, further reducing the threat that China’s economy will overheat. We continue to believe that the danger that policymakers will be forced to tighten abruptly, threatening a hard landing, is very low.”

But Diana Choyleva, economist at Lombard Street Research, argues that Chinese policymakers have fallen behind the curve and need to act decisively if they are to curb inflation.

“The longer growth stays above trend, the worse the necessary downswing is set to be. Over the next 12-18 months, China is set to pay the ‘growth price’ of its excessive policy stimulus.

“Beijing engineered an unprecedented monetary and fiscal expansion in response to the 2008 recession. But with the economy’s trend growth rate declining, monetary and fiscal easing did more to accelerate inflation than to achieve a sustainable boost to growth.

“Policymakers will be slamming on the brakes, with more interest rate hikes in the offing.

“The danger is that China’s violent cycle could be highly destabilising not just for China, but also for the global economy, which remains in a precarious position.”

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