December 13th, 2010
10:39 AM GMT
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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?



soundoff (36 Responses)
  1. Abu

    China will continue to have a robust growth, but maybe not at the breakneck speed like the recent past. Its big customers like the USA had been buying from China with reckless and easy credit. But now they are in heavy debt and can't buy as much like before. They have gone poorer. But China will grow with internal consumption growth. And make no mistake about it, China is still very competitive and still has a big supply of cheap labor from its hinterland. USA will weather a few years of belt tightening, but USA will bounce back strong after that, lean and competitive. USA still has an edge in technology and the ability to attract the best talent in the world. The end result will be a duopoly with USA and China dominating everything. Maybe it is good that there is a healthy rivalry betweeb these two giants. Imagine what could happen if they gang up on the rest of the world!

    December 13, 2010 at 12:32 pm |
  2. Archer

    no, I could hardly agree with Abu .... Consumer demand curve is unable to be easily changed. Situation even is expected to become worse. With evaporation of population bonus, people's worries about the vulnerable social welfare system and the unbelievable house price, chinese people dare not consume as Amerians do. Meanwhile, the rapidly rising inflation rates and the limited investment channel render chinese people's bank savings generally volatilized.

    Moreover, the ineffective state-ownedcompanies can borrow large amount of money from state-controlled bank, while prvate companies always face with a interests rates above 20%. Infrastructure benefited the economy, but also gave to much power and priority to the governments and state-owned companies, which caused a consequence of "the Arrogance of Authority" . To be honest , i really worry about chinese economic sustainability; full of enough strength but lack of essential vigors, this kind of economy have to be changed.

    December 13, 2010 at 1:35 pm |
  3. David Ran

    I also believe that China will continue its robust growth rate in the next few years, but not at the current rate of 10 percent. Currently, the economy development mainly relies on export and foreign investments. It is obvious that such development mode is not sustainable and would be a catastrophe if another sever financial crisis comes. However, although the Chinese government has tried in the past years to change its economic scheme, from foreign investment dependence to domestic reliance, it has been proved a failure at least at present. The major reason lies in the huge gap in wealth distribution between the rich and the poor, the west and the east. Only a much more equal wealth distribution among most of the society members could a health economy becomes realistic.

    December 13, 2010 at 3:17 pm |
  4. inflation less relevant

    China had high, indeed runaway inflation in the 90's until the Chinese government learnt to stabilize their newly created market economy. Inflation was controlled and the growth remained. What is the difference between now and then? Is inflation really saying anything about China's growth prospects? Unlikely.

    December 13, 2010 at 4:00 pm |
  5. Kingtey

    The big two should change foreign policy and cooperate with each other with a wiser and evolutive eyeshot.

    December 13, 2010 at 4:02 pm |
  6. Alexander

    As for me China will grow at a good rate for a while but the inflation will mess up what is built based investment. Here I think worth reminding population is not only the ingredient to ensure internal consumption but the behavior of a nation in spending than saving. See US only 5% of world population but consuming more than 40% of goods in the market. Even Japan cannot make it for these yrs.See what would happen for a slight change in export.... I think china shall grow dramatically slowly . This is a time to challenge with economics not trade.

    December 13, 2010 at 6:03 pm |
  7. China Joe

    I live and work in China these days and have been in the thick of consumer products here for many years. The Chinese people are very positive with regard to Americans and are very accepting of us.
    This is a marriage between the 2 economic powers of the world....we complement each others strengths and weaknesses well.

    If our elected officials don't screw it up, there is great positive potential for this relationship in almost every area.

    December 13, 2010 at 9:36 pm |
  8. Abu

    You got to visit China frequently over the years to see the difference in spending behavior of the Chinese people. It is not true that the Chinese people have not increased their spending. The sheer increase in consumerism in the west coast is very obvious. And in the hinterland , consumerism is slow but surely increasing as well. Of course it is still very small as compared to the USA. But then US consumption should not be mimic by other countries as it is very excessive.

    December 14, 2010 at 3:31 am |
  9. KT

    The gaint get hurt but this must be chance for other potential Asia countries like India, Vietnam...

    December 14, 2010 at 4:01 am |
  10. Abu

    More American companies should figure out how to sell to China instead of just bitching and running to the politicians for protectionism. There are many companies from the US and other countries who have done well in China. For example, HP, VW, Audi, Mercedes, etc have made strong gains there. Even Apple has made a strong entry. The fashion companies from Europe are also lapping it all up. Sell them what they want, and you will find a big market there. Understand their market and be there for the long run.

    December 14, 2010 at 5:26 am |
  11. faceonabox

    I think right now is an interesting time to start learning about China and the Chinese language. I've started to take lessons online with Surf Chinese and am now planning on taking a trip there in a few months to practice what I've learned and experience the country!

    December 14, 2010 at 5:53 am |
  12. Dr. Nick c/o Hong Kong SAR

    Who writes this rubbish ?

    The Chinese economy is a paper-tiger. Most sensible economists have assessed China's economy as artificial. Their construction boom is set for a bubble. Their GDP is wholly deficient upon the US and Europe. Their daily reports of growth, construction, innovation, etc. are largely driven by a communist propaganda machine.

    December 14, 2010 at 6:15 am |
  13. juggernauty

    China has been growing for years and now it faces the same challenge that many developed countries have ever had. I think it's time to change, to decrease investment, inrease consuption, develope high tech and culture industries and get economic energy internally. I believe china will solve these problems in 20 years and keep growing.

    December 14, 2010 at 9:50 am |
  14. zyw

    growth rate is not the most important. stability is the most important only .we have a strong government.and we have enough talents.we can make everything successful only if our government don't make great mistake

    December 14, 2010 at 1:42 pm |
  15. Bill Rich

    China's growth in the last thirty years was accomplished by converting the underemployed farmers to unskilled labor in manufacturing, using foreign investment to kick start the conversion, reduce cost by allowing pollution and mistreating the labors, and allow the worse form of capitalism – no rights for labor to negotiate, no right for victims of industrial accidents, and zero enforcement of labor laws, and even slavery (in brick kilns and others), and expanded it's money supply at an unheard of rate (10 fold increase in 10 years, reaching three times of money supply of US at 1/3 of US GDP.), and use government directed investment as a major growth effort. Now that majority of the convertible farmers are used up, the land, water, air are saturated with pollution, running away inflation (compared with other countries today), a fast aging population, I think this is a prime studying area for all economist of what can go wrong.

    December 14, 2010 at 3:36 pm |
  16. Dozo

    If Chinese government has the balls to regulate its underground economy, we'd be surprised that China's economy has grown almost two times bigger than its official GDP figure over the past 30 years, 4.1% inflation rate is almost nothing compared to how big China's economy truly is.

    December 14, 2010 at 10:24 pm |
  17. lsw

    China ,It's hard to express my love to you!

    December 15, 2010 at 1:40 am |
  18. naveen

    China has the manufacturing skills,investment making it the manufacturing hub from US,Europe,Japan and is very competitive.With rising incomes internal consumption will drive the growth and in 30 yrs
    will be bigger than US.

    December 16, 2010 at 3:01 am |
  19. andy

    stop all the mumbo jumbo LOL....we'll see in 20 years... :D

    December 16, 2010 at 5:44 pm |
  20. sbny

    I visit China once or twice every year. I'd say vast majority of Americans (90% – 95%) just simply do not know about China, and what China is like, and how the system work. All the news in the U.S. are very biased toward China, and are often reporting only the negative news to suit American people's taste (Americans love to see negative news about China), and you can't trust the news here 100%. You have to disgard your old impression of China such as the days of cultural revolution. China now is completely different from then in all aspects. You have to go and live in China in order to have better judgement on the government and people in China.

    December 16, 2010 at 5:47 pm |
  21. Crane

    As a chinese,I am very sad to see my country is not healthy.
    Would next decade be great stagflation in China?

    December 17, 2010 at 1:43 am |
  22. shelly

    I am chinese,and living in china.
    I should say this is a tough year for china and ordinary Chinese.Due to the shadow of financial crisis and raise of currency rates to US dollar.But we are trying best to make a living.
    What happen is happened(economy crisis) ,the only thing we can do is taking care of ourself,and hoping next year will be better.
    I think most of American also agree with me,don't they?
    So,I don't see any necessary for our two countries to be enemy,and people over the world now have a mutual goal–walking from the shadow of economy crisi.
    Wish a better year for world economy next year.
    BTW:welcome to china to explore the real china,not the china CNN says.sometime it's not true.
    and about chinese government,I should say may be it is not as democratic as U.S.A's,but it is improving,trying to lead this big country to a better future.
    People make mistakes,so does authority.
    We must learn how to forgive.

    December 17, 2010 at 1:00 pm |
  23. Manuel Vilhena

    Let's see the first two quarters of 2011.

    Manuel Vilhena

    December 18, 2010 at 7:14 pm |
  24. acyk

    Most westeners don't understand how communist China works. Her system is a planned economy, supported hundred of thousands experts. Once the plans are approved by the central committee, they are implemented in the shortest possible time. Money is not a problem as China has more than 2.5 trillion usd in foreign exchange.
    A good example was the Beijing airport terminal 3, which was completed in 4 years as compared to 20 years for Healthrow airport terminal 3 in uk. Another example is their high speed train devolopment. Within last 5 years, they put in service over 7000 km tracks with trains operating at 350 km/hour. By 2012, Shanghai to Beijing will by in operation with train speed of 380 km/hour, cutting travelling time to less than 5 hours.

    As for inflation, the government has targeted to bring down it to an acceptable level ( ie about 3%). One has to belief it because China can do it. The cause of recent inflation is due to increase of food prices in the CPI. The government just approved 100 billion Yuan (15 Billion usd) over next 5 years to improve farmland for the nation food security. It plans to bring 4 million hectares of land in cultivation.

    Recent increase in bank's reserve ratio by another 0.5%, the 3rd time within 1 month, is the right approach. This to to reduce money circulation, especially to housing sector. It did not raise intrest rate because it will affect whole country economy. China is aiming for a "Soft Landing". China central planning committee knows what they are doing without any interferring, unlike so called western democracy.

    December 19, 2010 at 12:46 am |
  25. acyk

    Hi, Bill Rich. Your comments on China on pollution, mistreatment of labourers, human rights, etc, reminded me of the situations in the western world, especially UK, some 200 years ago during the "Industrial Revolution". If you have read Charles Dickens' Oliver Twist, you would have observed the conditions were much worse than China today. There were child labour, no human rights and air pollution everywhere as people were still burning coal. Even up to late 1950's when I was jn UK studying, households were still burning coal in their fire place. And by 6.0pm, outside the house was covered with thick fog with visibiity less than 5 metres. Now that the western world has become rich, they has the right to point finger at others. What a shame! But China is aware of polution problems and has targeted to reduce it by 60% as stated in COP meeting. China has started to pull down all the polluting factories like old steel mills, etc. It also embarked on renewal energy development by setting up huge wind turbine and solar farms to generate electricity, Also more hydropower
    stations are being built after the completion of 3 gorges dam power station. It may takes China 20 years but it is much less than 200 years.

    December 19, 2010 at 2:16 am |
  26. liuo

    well,good friends ,just want to say that china have a very long way to go .infact they are still poor,if citizen cant afford a 3 dollar meal,it means nothing is moving well.china is eating from the pockets of the citizens putting them into more difficults which has resulted a lot of kiling and corruptions among the citizens.bend down and you will see china very well. .iam chinese, years though the economy is booming but they have nothing to show off.they dont care about us either,they want to show case to the world that that they are what they are not.trying to compete .they are only trying to pretend because pretence is their blood.if ask a chinese person if he or she needs help he will tell you no,but if you mistakenly keep your bag down ,you will no longer know the way about of your bag.they are good in stealing both man and woman.it will take them millions of yrs to be like japan

    December 20, 2010 at 3:02 pm |
  27. Sarge

    forseeable-it's called oil-used to transport and move everything
    you reallly can't sell things under its costs and that includes the cost of raw materials
    --the search for oil and its depletion brings costlier run wells online
    --so it must be costing the earth even with cheap labour
    --are the railway lines in china electrified to their own coal or are they diesel--important for cost structure-you do have to transport workers don't you
    --about the only thing i can think of !!!!
    considering the US economy is showing signs of movement–oil at $90 a barrel imports down exports up ??? is china selling more ???
    so one has to question "tradeable" growth

    sarge

    December 23, 2010 at 3:18 am |
  28. sundee

    Chimnese are famous for selling cheap and unhealthy products to other countries. In India people alwasy think that Chinese products means that these can be trusted for about a day not for even a fortnight. But its the fact...no chinese eproduct you can judge with quality. these are all reversed engineered. China is just good at reverse engineering nothing more. They can reverse engineered the Russian jet engine too.:)
    What a tragedy!! Still some foriegn companies are going to china just for cost. I am sure chinese economy is going to suffer. Chinese people are hard working but not like the indians, Indians are hard working and smart too. If we talk about the future economy, it's India which will go from strength to strength.

    The dictorship and dictateded economy won't grow much. I see many European countries are buying chinese cloths and electronic items but if I comapre those with indian products, I just get laughted at thise people who buy these products. So I am not sure how China can compete with US or India( 2nd fasted growing Economy) in terms of qulity and durability. Its ovbious that chinese economy is just like a star seen sometimes during day time!

    December 25, 2010 at 10:19 pm |
  29. Seeni Trajah

    China is copying other product and do it better at a cheaper than Japan do. But on long term chinese workers are getting old and future workforce,one worker have to support 4 person, because of the one child policy. Chine need to import workers from Africa for her industires.
    But India comes at a slow and steady speed and their workforce is very young and with more investment coming form outside India could overtake both big brothers.
    Anyway future is for Asians, actual centre of gravity of mankind will reflect in the Economic and prosperity and dont know whether China and India can hold their countries with out any more division.
    Amerika will run the shot for the world for quite some more decades.

    December 27, 2010 at 3:42 am |
  30. linuxaomi

    The older I grow the more I adore and love animals. Birds in particular.

    December 27, 2010 at 4:59 am |
  31. Bartowski

    Maybe the era of easy growth is gone, but not the era of growth. Growth in China was never really easy. Hundreds of millions of people changing their life-style completely, from farmers to city migrant workers can hardly be called an easy process. The magnitude of migration like that can be compared with America conquering its Wild West, which was definetely not easy. This process still continues. You can still see farmers in trains going to big cities. The fact that China became a second largest economy, leaving behind Japan is not just symbolical. Something very interesting is happening. The center of gravity, the palm of leadership in Asia is moving away (has already moved) from Japan (which for the second part of the 20th century was a legendary pride of Asia) to China. In the second part of the 20th century Japan was something very special – one asian country joined the club of developed Western economies, G7, and became a second largest economy in the world. People in the Western countries were learning Japanese, Japan was exporting not only its manufactured goods, but also its culture and religion, etc. But now people in Western countries buying Chinese goods and learning Chinese. They are learning Tai-Chi, and Chi-Gon, not Zen or Nichiren. Kung-Fu is becoming more popular than Karate ever was. Japan will become like Finland or Norway in Europe – nice life, but nothing really to offer. China on the other hand is becoming like Germany in Europe – the driving force. So, the 21st century is the century of China, and no inflation of deflation or anything else is going to change it. I am not Chinese, I am a European living in China and observing.

    December 29, 2010 at 12:48 am |
  32. eaglewod

    we are done..although i hope not

    December 30, 2010 at 3:25 am |
  33. Alexzandro Rivera

    China's growth was under a communist policy dressed as socialist, but now it's really just reaching capitalism. Capitalism will be the only versatile option available for China to maintain economic balance and social stability; stability period. When people are hungry, they will fight.

    China will not pass the US economically anytime soon, but the country's economic growth was only enabled by the goodwill of the West for "world peace." At any given time we can pull out and China's economy will collapse into the mud brick roof it's under. Fearing China's economy is no different than fearing a possibility of an infectious mosquito with cholera killing an entire nation.

    With the facade of "world peace" it seems more and more the West will win against communism for the first time in history without the need of war. What will China's economic policy be now that the Russians are pipelining oil into the largest energy consuming nation[which shouldn't be proud of and most likely give Western fuel efficient automobiles a boost in sales]? Will they feel responsible for worldwide inflation on crude oil and other products that rely on oil byproducts? There's no power on Earth that can control compounded interest, and everything else involved with investing.

    I believe China will have no other recourse but to change their economic policy into capitalism, which we will start to see such policy changes in Winter 2014; if not sooner.

    January 2, 2011 at 5:42 am |
  34. piaofu

    I am amused by some posts here , one even suggesting China
    that China's economy is a 'paper tiger ' . How many critics, like
    this person, have been to China, lived and worked there? I bet you
    some armchar critics know next to nothing about the amazing
    developments that is ongoing inside China. I can tell when someone is merely speculating about China by the bullshits. China has got the most millionaires in the world, almost 1,000,000. These people are blood and flesh – they are not made of paper. hahaha!

    January 17, 2011 at 11:17 am |
  35. DBP

    I've been working and living in China for 4 years now, and have Chinese colleagues and friends. China has really boomed in the city I live which is Shanghai and many other larger cities, still many people live in poverty and the difference between poor and rich is extremely big.

    House prices in Shanghai and Beijing are insane, and well educated professionals have no chance of buying property, without family help. Most parents pay for down payments of around 30% (often having that money saved up for their only child) because otherwise no house, no GF, no family.

    Im not sure about the Economy itself, but i know China GDP growth is largely related too property investment, the millionaires PiaoFu talks about i bet 80% are Millionaires because of property appreciation over the last 5-6 years. Speculation has risen through the roof, and im pretty sure it wont last. Demand will go down, and with everything from Inflation to more restrictions on the flow of money and cheap money being tightened im sure something will go down in the coming few years.

    I once heard a this Hedgefund Dude Paulson say that Property investment is China's Herione addiction and with it its GDP would plunge, im not sure if thats true, but it makes sense if i look around me.

    I play tennis at this compound in a pretty remote area, Metro 30 minutes walk, no supermarket nearby (yet), nice place i have to say but it goes for around RMB 60.000 a square meter...with the minimum being around 120M2 its been completed 7 month ago and is still 80% empty, which im not surprised about, every conversation I have with young professionals is about buying their first property and how they want to live in a decent looking place but cant even come close to affording one, while having more than average Shanghai city incomes!

    Do love China a lot tho, still buzzing and a place with many opportunities!

    January 18, 2011 at 4:05 am |
  36. icons archive

    Rather excelleent idea

    hpixel

    September 22, 2012 at 10:35 pm |

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