Concerns about a hard landing in China's economy have arisen recently, weighing on sentiment in the Hong Kong stock market.

Professor Noureil Roubini of New York University made just such a blatant prediction on June 11, citing the accumulation of non-performing loans and serious overcapacity on the mainland.

Meanwhile, investment guru George Soros argued that China has lost the opportunity to contain inflation and faces the risk of an economic hard landing.

Are such concerns justified?

Indeed, economic growth in China has slowed down this year, with GDP growing by 9.7 percent (all percentages in a year-on-year basis unless indicated otherwise) in the first quarter, 0.5 percent and 0.1 percent lower than that of 2010 and the fourth quarter of 2010, respectively. Furthermore, growth in value-added industrial production moderated to 13.4 percent in April and 13.3 percent in May from the first quarter's 14.4 percent, indicating a further slowdown in economic growth in the second quarter.

However, this is what was intended and expected by the central government with its monetary tightening policy. The economy recovered strongly with 9.1 percent growth in 2009, and extended the rally by 10.3 percent in 2010, pushing up inflation and raising concerns about overheating again. Against this backdrop, the central government raised the curtain for a new round of monetary tightening by hiking interest rates in mid-October 2010. Since then there have been four interest rates hikes with the one-year lending rate increased from 5.25 percent to 6.25 percent, and nine reserve requirement ratio (RRR) rises with the RRR for large-sized banks up from 17.0 percent to 21.5 percent and for small to medium-sized banks raised from 13.5 percent to 18.0 percent. Meanwhile, the People's Bank of China (PBoC) performed open market operations in the money market and conducted the so-called window guidance to commercial banks frequently. The economic slowdown is thus a direct result of such monetary tightening, and represents a healthy economic adjustment for both the government and the market.

The tightening stance is set to continue in the second half of this year. But the magnitude of it is expected to reduce, with the frequency of tightening measures likely to decrease significantly. It is expected that there will be one more interest rate hike and one to two more rises in RRR in the second half, much less than those in the first half. As a result, the economic slowdown should be stabilized in the times ahead. Inflation, albeit still high, is also expected to ease. GDP and CPI inflation are forecast to rise by 9.4 percent and 4.7 percent, respectively, for full-year 2011.

There is no doubt that 9.4 percent is rapid economic growth by any standard, but it is already slower than the growth rate of 2010 and the average for the past 32 years.That is to say, the economy is unlikely to see a hard landing this year.

Looking at the longer term, the likelihood of a hard landing is also very low. Be noted that after 32 years of rapid growth, China's economy is only half way through its high growth period, and another 30 years of rapid growth can be expected. Many would be concerned about the exhaustion of growth drivers. In fact, there is a long list of such drivers: including continued urbanization, a consumption upgrade, industrial restructuring, scientific and technological progress and innovations, the catch-up of western and central China, the rise of a new breed of knowledge-oriented talent, emerging industries such as low carbon, internet and genetics, and further reforms of the economic system.

Therefore, at this stage, China's economy exhibits all the features of "being easy to heat up but difficult to cool down". That is, without government tightening the economy will always run at an overheating pace. Conversely, with the government tightening the economy, it is unlikely to cool down sharply or have a hard landing - unless the tightening measures are a case of over-kill.

While the possibility of government over-kill cannot be completely ruled out, the odds are very small, given the central government's good record on macro-economic controls over the past decades.Once signs of over-kill and resultant economic hard landing emerge, the central government will relax the tightening measures.The recent remark by Premier Wen Jiabao that credit growth is now back to normal indicates that the central government is already considering relaxing its monetary tightening.

The two problems cited by Professor Roubini are in fact old problems. But the question is whether the problems are incurable and can cause an economic hard landing. It's worth noting that an encouraging improvement in the two problems has been made through the tremendous efforts of the central government over the past years. With continued government efforts, the two problems are unlikely to deteriorate to the point that brings down the economy sharply.

Indeed there are still many other problems that may threaten to bring about a hard landing, but the dominant trend for China's economy over the coming decades is still continuous high growth, under which the problems are expected to be gradually resolved rather than deteriorate.

The author is senior vice president and chief economist/strategist for China Banking Group at CITIC Bank International. The opinions expressed here are entirely his own.

(HK Edition 06/30/2011 page2)