Hong Kong, China (CNN) – For three decades, China has had a breath-taking annual growth rate of 10 percent, vaulting most of the developed world to become the world’s second largest economy behind the United States.
But there are signs that China is entering a new era of growing pains as its economy matures.
November inflation was a surprising 5.1 percent, led by rising food prices, but analysts have noted that prices are rising for property and clothing – stoking fears of a wider inflation conflagration.
“We’ve had an easy ride in China for awhile of creating massive growth without worrying too much about inflation,” said Kirby Daley, a senior strategist at Newedge Group.
“However, in 2011, we’re getting to sort of where the rubber meets the road. The period of hyper-growth without inflation is probably coming to an end because they’re starting to get themselves into a box,” Daley said. “In China, they’ve mainly grown through investment, so if they really want to stop inflation, they have to stop that flow of investment. That’s going to hurt the economy.”
Many China watchers expect that the government will drive up interest rates to keep inflation at bay. So far, no move has been forthcoming, which cheered Asian investors and caused Chinese stocks to continue to rally.
Still, the government raised the capital requirements – the amount of cash Chinese banks need to have on hand – last Friday, the third time in a month.
“It was widely expected they would take this opportunity to also raise interest rates, which they didn’t do,” Daley said. “ And that is somewhat of a sign that they are going to try to deflect over-tightening (and) shocking the markets.”
But eventually Beijing will need to act “probably in the first quarter of next year, and if they don’t begin to ease it in, then they’ll have to act more forcefully – and that’s what investors should be concerned with, a bigger shock later,” Daley said.
In the past, inflation has led to social instability and protests – something Beijing goes to great lengths to avoid. Lurking behind all this is the specter of a bubble pop in the Chinese property market, and a larger question of what awaits Chinese economy – a soft economic landing, or a hard one?
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