Investment in China will slow down. The only question is whether it slows the easy way or the hard way. China's investment in fixed assets - roads, buildings, production lines and the like - grew at the rate of 30 per cent in its urban areas over the first four months of the year, compared with the same period last year. In cash terms, Chinese businesses and government bodies sank a total of 1.8 trillion yuan of new money into projects in the country's cities between January and April. That amounts to almost a third of China's total economic output over the same period. China's economy is growing quickly but nothing like as fast as 30 per cent a year. In the first quarter, gross domestic product grew at a 10 per cent clip. Clearly, investment growth cannot continue to outstrip overall economic growth by such a wide margin. If fixed asset investment were to keep growing at 30 per cent a year and the overall economy at 10 per cent, within eight years China's whole economic output would consist of nothing but investment. That is a nonsense scenario but it does demonstrate that the current pace of investment is unsustainable and that it must slow. There are two ways this can happen. Firstly, investment can maintain its break-neck pace until it becomes clear that returns have fallen way below its capital costs. In that case, confidence evaporates, liquidity dries up and investment comes screeching to a halt in a classic hard landing. Secondly, the monetary authorities can move now to limit the supply of money available for investment, most obviously by raising the cost of capital. Hopefully investment slows to a more sustainable trajectory and economic growth continues, albeit at a more moderate pace, for a soft landing. China's authorities are aware of the danger and are keen to engineer a soft landing. Last month the central bank raised its benchmark borrowing rate by 0.27 of a percentage point and so far this week it has borrowed heavily in the domestic money market, selling 155 billion yuan worth of short-term debt in an attempt to mop up excess liquidity. Beijing's problem is that it does not want to slow investment equally across all sectors of the economy. Central government officials would certainly like to put the brakes on investment in local government projects which was up 31 per cent over the first four months of the year. At the same time, however, Beijing is keen to encourage investment in the coal mines and railways - up 58 per cent and 86 per cent, respectively - after years of neglect. And in the property sector - where investment rose 21 per cent to 413 billion yuan - officials are anxious to redirect investment away from speculative luxury residential developments and towards low-cost housing. The government is hoping to achieve some of this redirection by tweaking tax, land-use and lending policies. Whether it can succeed is doubtful. Given plenty of cheap capital and the prospect of quick returns, investors have little trouble circumventing official restrictions. The only answer may be to increase the cost of capital across the board, by raising interest rates further. Coupled with other measures, Glenn Maguire, the chief economist for Asia at Societe Generale, believes another rate rise could succeed in slowing fixed asset investment growth to 18 per cent by the last quarter of the year, and to an average 16 per cent next year. Not everyone is so optimistic. Diana Choyleva, an economist at Lombard Street Research, believes that overinvestment means China's net return on capital, once depreciation has been factored in, has already fallen as low as 1 per cent to 2 per cent. She argues that the pace of investment can be maintained for a few years yet but that in the end a hard landing looks inevitable.