COMMENT: Alarm bells quietly ringing on China

By Chris Brook-Carter | 20 January 2011

China. A land of opportunity and panacea for all that ails the global business community or an economic time-bomb ready to explode the World's fragile recovery and plunge us back into a second crisis in so many years? Whether it's pundits on the television or economists in the newspapers, no one can seem to agree.

One thing seems certain: China is now a pillar in the growth plans of many of the world's largest manufacturers and retailers. Firms in the auto industry are making hay in a vehicle market that soared 33% to over 18m units last year. General Motors now sells more cars in China than it sells in the US. Strategies to grow sales in China have become a priority for both OEMs and suppliers in recent years; moreover, steadily expanding sales in China are underpinning profitability for many.

Figures out today should have been encouraging then. China is already the world's second largest economy. And, Chinese authorities said that its economy grew 10.3% in 2010, marking the fastest annual pace since the onset of the global crisis. According to estimates, China could overtake the US to become the largest economy in the world by the 2030s.

But whilst the West struggles to take any step towards growth, the fear for China is that it is close to overheating, particularly with regards to inflation, which was running at 4.6%, and a credit boom that the government seems to be struggling to curb.

These fears have prompted a number of hedge funds to set up distressed China funds. As one academic was quoted in the UK media this week as saying: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.”

Even Goldman Sachs, for so long a fierce supporter of China's prospects and the company that invented the BRIC acronym, has taken a dimmer view of things this week.

Tim Moe, the bank's chief Asia-Pacific strategist said this week: "To be frank, we may have held on too long to our overweight position in China last year. We have decided that discretion is the better part of valour and have tactically reduced our weight. Asia is not in the sweet part of the cycle. The longer-term picture of Asia outperforming the US is taking a breather.”

So far those betting against China's continued stellar performance have yet to be proven right and the hope is that China's huge population will continue to fuel demand. Growth figures for the fourth quarter defied expectations of a slowdown, rising to 9.8% from 9.6%. And inflation eased a little to 4.6% in December from a 28-month high of 5.1% the month before. Inflation for 2010 as a whole was 3.3%.

But the Bears only argue that the longer China's fall is postponed the heavier it could be. And whilst inflation rates are behind this time last year, they are still near historical highs and well above where is healthy. The irony is that whilst the growth levels reported today may be welcomed by those presently looking for short term gains in the market, they may finally convince the Chinese authorities that now is the time to make a determined effort to cool the economy down. The alternative of a credit and inflation boom left unchecked could be far more unpleasant.