In 2011, the big challenge facing China will be to forge ahead thoroughly with the moves initiated this year to abandon its extremely stimulating economic policy without choking off the economy in the process. There are already signs of overheating in several parts of the economy: the vigorous lending activity in the banking sector and real estate price trends have been cause for concern for some time now. What is more, yet another problem has reared its head of late: inflation. The increase in consumer prices has gathered considerable pace over the past few months.
We believe that the Chinese government should be able to master the balancing act inherent in a "controlled growth slowdown". China has proved capable of rising to this challenge several times in the past. Nevertheless, the risks associated with this particular balancing act are not to be taken lightly. We see possible negative (financial) repercussions above all on the state finance front and less so in the real economy. If, for example, a sharp rise in non-performing loans puts the Chinese banking system into a precarious spot, a capital injection from the government would be more than likely. It wouldn't be the first time, after all.