A tale of two halves

Economy heading for a soft landing, but hard questions remain on the inflation front

Is the China economy heading for a hard or a soft landing?

Many of the recent indicators have presented a worrying picture. Manufacturing output, as measured by the Purchasing Managers' Index published by HSBC, fell this month to below the 50-mark (an indication of a contraction) to 48.9 from 50.1 in June. The official China figures have yet to be released.

Related: The realistic China growth scenario

Inflation, as measured by the Consumer Price Index, is still soaring ahead, fueled by higher food prices, reached 6.4 percent in June, a sharp rise from May's figure of 5.5 percent.

In a report in June by the National Audit Office, China's leading auditor, it emerged the local government sector, responsible for many of China's major infrastructure projects, was heavily in debt with borrowings of 10.7 trillion yuan (1.15 billion euros) in 2010, around a quarter of China's GDP.

The Chinese government has been trying to steer a soft landing after prime pumping the economy with 4 trillion yuan (450 billion euros), believed to be the largest economic stimulus packages in history, in the wake of the financial crisis.

Worried about over heating, it raised interest rates for a fifth time in eight months in July with one-year lending rates being upped by 25 basis points to 6.56 percent.

It has also implemented a serious of other credit-tightening measures. This has had the effect already of steadying growth, down from 9.7 percent in the first quarter to 9.5 percent in the three months to the end of June.

Economists are divided as to how successful the measures have been. The International Monetary Fund warned of the risk of the Chinese economy heading for "a hard landing that reverberates beyond China" earlier this month.

Experts give their predictions on a hard or soft

Robert Lawrence Kuhn, leading China commentator   "Reserves are still 50 percent greater than even the most extreme estimates of local government indebtedness."   Hard landing: 3 Soft landing: 7	Duncan Innes-Ker, senior economist, Economist Intelligence Unit, Beijing "I would say that overall we are optimistic about the landing being quite soft." Hard landing: 3 to 4 Soft landing: 6 to 7	Stefan Halper, senior research fellow at Magdalene College, Cambridge   "I don’t think the economy is going to collapse… but the near term is going to be difficult."   Hard landing: 6 to 7 Soft landing: 3 to 4	Donna Kwok, greater China economist at HSBC   "Any economy that is heading for a hard landing would not be growing at the trend rate."   Hard landing: 0 to 5 Soft landing: N/A
Michael Spence, professor at Stern School of Business, New York University and Nobel Prize winner "It appears that China is steadily reining in infl ation and intervening to prevent excessive asset price rises in real estate markets." Hard landing: 1 to 2 Soft landing: 8 to 9	George Magnus, senior economic adviser, UBS Investment Bank   "In the end — and this may be in 2012 or 2013, maybe even later, I think there will be a hard landing, which will take the form of a good old fashioned investment bust."   Hard landing: 6.5 Soft landing: 3.5	Wang Jianmao, professor of economics at the China Europe International Business School   "The most risky and dangerous thing is that if you don’t know there is a danger."   Hard landing: 2 to 3 Soft landing: 7 to 8