China just won't slow down. Double-digit fourth quarter GDP of 10.7% brings full year growth in at 8.7%--well above a government target of 8%--but also looks likely to heighten concerns of industrial overcapacity and market bubbles. Fueled by a $586 billion stimulus package plus a massive surge in lending, the mainland's fastest growth since 2007 also saw a 30.5% surge in 2009 urban fixed asset investment. And with one-quarter of that investment coming from property construction, fears of a real estate bubble are spreading--that despite recent measures to rein in prices, as well as a December deceleration in property sales and construction.

Inflation too looks to be a central concern in 2010, with China registering a consumer price rise of 1.9% in December, the second month of the upward trend. There was some good news on China's efforts to strengthen so-called private consumption (not the government-driven variety) as an economic driver: in a year where China ousted the U.S. to become the world's largest auto market, retail sales were up 16.9% for the year, with urban incomes up 9.8% and rural one's rising 8.5%. According to a note released today by CLSA Asia-Pacific Markets China strategist Andy Rothman, "China remains the best consumption story on the planet."

Still, Chinese officials are getting nervous. China's top banking regulator has confirmed that his agency is asking some banks to limit their lending and China's premier Wen Jiabao said that China must "well manage" credit growth this year. China will limit lending to $1.1 trillion in 2010, down about 22% from last year, banking regulator Liu Mingkang announced in Hong Kong yesterday. And earlier this month, China's central bank ordered lenders to raise their reserve deposits.

But pulling off a soft landing will hardly be easy. China wants to bring down growth to a more manageable level, but certainly doesn't want to slam on the brakes too hard. If loan growth is reined in too sharply, that could injure companies already challenged by shrinking profit margins. If the property bubble is popped suddenly rather than slowly deflated, millions of workers in construction and related industries could lose their jobs overnight. At the same time, taking too slow action risks more overheating and an even harder landing down the road. As Beijing begins taking steps to cool its economy, policymakers have the difficult challenge of balancing those two contradictory needs.



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