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Economy sets sizzling pace

By CNN's Geoff Hiscock, Asia Business Editor

Life in the fast lane: Ferrari F430 on display at the Shanghai motor show.
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2001: 7.3 percent
2002: 8.0 percent
2003: 9.3 percent
2004: 9.5 percent
2005: 8.0 percent (est.)
Source: IMF

Area: 9.6 million sq. km

Population: 1.3 billion

Capital: Beijing (pop. 15m)

Commercial center: Shanghai (pop. 17m)

Language: Mandarin, various dialects

President: Hu Jintao

Prime Minister: Wen Jiabao

Gross Domestic Product: $1603 billion (2004)

Growth rate: 9.5 percent (March 2005)

Forecast growth: 8.0 percent (2005)

Per capita income: $1233, but $4930 in purchasing power parity

Inflation: 2.8 percent (2005)

Unemployment: 5.5 percent

Exports (goods & services): $652 billion (2004)

Imports (goods & services): $631 billion

Main trade partners: U.S., EU, Japan, East Asia

Foreign exchange reserves: $640 billion

Source: WTO, IMF, HSBC April 2005

(CNN) -- After a stunning growth rate of 9.5 percent for the past 15 months and 9.3 percent for the year before that, most analysts expect China's government-induced cooldown finally will start to have an effect later this year.

They expect growth this year will slow to about 7 or 8 percent -- still better than any other significant economy in Asia and more than enough to keep China's mantle as a global engine of expansion.

But a credit tightening is on the cards, with an interest rate hike of 27 basis points expected by the end of June.

That follows the move last October, when China's central bank raised rates for the first time in nine years and pushed the benchmark rate to 5.81 percent.

Some analysts, such as Morgan Stanley's Hong Kong-based Andy Xie, believe China could maintain its frantic pace.

He recently lifted his 2005 forecast from 7.8 percent up to 9.5 percent, after Chinese government statistics showed no sign of a slowdown in the first three months of the year.

Even so, along with the internally mandated slowdown of investment in overheated sectors such as property and urban construction, there are some clouds on the horizon.

China's voracious demand for energy and raw materials to feed its industrial base has pushed up prices for oil, iron ore, coal and other base metals, and added to inflation pressures.

Its banking system is in poor shape, with a mountain of bad debts still to be digested, and it remains heavily reliant on oil imports.

On top of that are the international political factors: recent stresses such as the deteriorating relationship with Japan, rising protectionist sentiment in the United States, and the continued pressure from the EU and the U.S. for a more flexible currency rate for the yuan. This environment is behind what Morgan Stanley's global economist Stephen Roach calls an "unbalanced global economy" at risk of becoming unhinged.

Roach noted on April 18 that China's import demand in the first three months of the year eased to 12 percent growth year-on-year -- just a third of the 36 percent growth rate of last year.

"A softening of import demand is also a classic warning sign of a slowdown in Chinese domestic demand," he said.

Xie, too, expects that 2006 will see a slowdown and is tipping growth to drop to 7 percent next year.

"Global monetary tightening should eventually end the liquidity party and arrest the seemingly unlimited capital flows into China," he wrote in a commentary on April 21, a day after figures released by Beijing showed China's economy grew at a sizzling 9.5 percent in the first quarter of 2005.

Global bank HSBC says the Chinese authorities are serious about slowing investment. Its view is that this, along with more restrained U.S. consumption, creates the risk of a growth slowdown in Asia in the second half of this year that is "quite sharp."

China's export push over the last few years has flooded the world with cheap consumer goods, and has attracted billions of dollars of investment from U.S., European, Japanese, South Korean and Taiwanese makers relocating their factories to China.

Industry leaders such as GM, Toyota, VW, Honda, Sony, Samsung, Dell and IBM have poured huge sums into their "China plays", creating production platforms both for their global markets and domestic Chinese forays.

At the same time, Chinese companies have been seeking to make a name for themselves internationally. In whitegoods, electronics, textiles, food & drinks, auto components and sporting goods, brands like Haier, TCL, Huawei, Lenovo and Tsingtao are on the march.

But some analysts say the hitherto optimistic mood about China may be changing.

"Once viewed as an unparalleled opportunity, the Chinese miracle is now being viewed as a threat by both the U.S. and Japan," Roach noted in a commentary on April 18.

He said that even in Europe, China was a source of political conflict via debate over ending the arms embargo and mounting concerns on its currency rate.

Roach says recent tensions with Japan -- one of China's biggest investors and trade partners -- unmasks what he calls "one of Asia's deepest faultlines" -- the struggle for pan-regional leadership.

Japan is clearly the world's second-largest economy behind the United States and has been for years. China now ranks fourth behind Germany, after overtaking the UK and France.

This red-hot economic growth means it has gained rapidly on the industrialized nations, both in consumption and gross domestic product. At an average 7.0 percent a year, its economy doubles in a decade; at 9.5 percent, the doubling effect comes in less than eight years.

But that same sizzling growth rate has prompted protests from the U.S. and Europe, which claim that an artificially low value for the Chinese currency gives the country an unfair competitive advantage in its trade dealings.

Now the risk factor has been ratcheted up and China can expect more of that pressure to come.

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