Electricity shortages and rampant speculation are among the danger signs Despite overall optimism for the economy, some economists predict flashpoints that may lead to a hard landing later in the year. Massive electricity shortages, rocketing excess inventory and rampant speculation in several commodities are among the danger signs. The economy has surged in the past seven quarters on exports, property and cars, but economist Andy Xie, of Morgan Stanley, wrote in a recent report that it is facing serious growth bottlenecks. 'It is facing growth bottlenecks in higher raw material costs, power shortages and environmental degradation,' he wrote. Although the nation had the largest foreign exchange reserves - more than US$400 billion - at the end of last year, economists say 'loose liquidity' is also causing rampant speculation in the market place, especially in raw materials. Prices of steel, cement and many other raw materials are at record highs, causing overhead costs of many manufacturers to escalate. Economist Hu Bilang, of the Chinese Academy of Social Sciences, said: 'Some trading houses are over-speculating, especially certain state-owned trading houses that have government-controlled monopolies. There still isn't true market competition out there.' Rising commodity prices are leading many local governments and entrepreneurs to build new plants, producing and processing a wide range of commodities. Economists fear that so many plants are under way that the market could go from a position of shortage to one of excess capacity. 'Local governments all try to create jobs by building up more capacity,' Mr Xie said. 'When commodity prices are high, as they are now, they can justify building more factories by extrapolating the current prices into the future. However, when prices fall, they keep the factories and jobs while banks suffer bad loans.' Although the government has just injected US$45 billion into the Bank of China and the China Construction Bank to cut down non-performing loans (NPLs), economists fear that more NPLs are in the pipeline as excess capacity hits the markets later this year. The government has tried to tighten loans at state-run banks, but economists say it is not enough. Rampant property speculation is another concern. New developments increased from 186 million square metres in 1998 to more than 550 million last year. Sales rose from only 107 million square metres to 330 million during the same period. Property sales rose by 300 per cent in the past five years but the gross domestic product rose by only 50 per cent. 'As the high-income population has bought into property, it would take big price discounts to sustain growth,' Mr Xie said. 'To sell the properties, prices would have to drop significantly, which could lead to substantial new bad debts [as developers go out of business].' Meanwhile, electricity shortages are shutting down assembly lines. Tao Dong, a chief economist for Credit Suisse First Boston in Hong Kong, said: 'Eight of 31 provinces are experiencing power shortages. I expect half of the provinces to be experiencing power shortages later this year. 'I think China's overheating crisis is more serious than the government thought,' he said.