On a day when the economic news out of the mainland was for the most part positive, it might seem churlish to dwell on the risks that could interrupt the country's growth story. But then that is exactly what the national leaders were doing yesterday. According to Xinhua, no less a body than the Politburo itself declared that the country's foremost economic policy priority must be to prevent overheating.
If even the Politburo is worried, then clearly it is worth examining just what the threats to the mainland's economy are and what damage they could wreak.
At first glance, yesterday's news appeared to be a powerful testimony to the success of Beijing's programme of economic reforms. On the Shanghai Stock Exchange equity prices soared to a new record high, up a huge 300 per cent in the two years since regulators reformed the shareholding structure of state-owned companies. Meanwhile, the credit rating agency Moody's upgraded both the mainland's sovereign rating and the ratings of a number of the country's largest banks. In its statement, Moody's cited China's strong balance of payments position, which it said 'provides insulation from external shocks'.
Finally the National Bureau of Statistics announced that urban per capita disposable income surged 17.6 per cent in the first half of the year, an improvement in living standards of which policymakers are justifiably proud.
Yet despite the country's undoubted achievements, the economy suffers from deep structural flaws and remains vulnerable to shocks. In a new research paper, Eswar Prasad, professor of trade policy at New York's Cornell University and former chief of the International Monetary Fund's China division, outlines some of the dangers. The mainland's huge stock of foreign reserves and modest external debts mean it is not likely to suffer the sort of collapse that struck Southeast Asia in 1997. But Professor Prasad warns of other 'indirect and subtle' weaknesses.
The main problem, he argues, is that monetary policy has concentrated primarily on managing the exchange rate. However, in holding down the value of the yuan, China has had to keep interest rates low, which has artificially depressed the cost of capital, weakening the banking sector, fuelling asset price inflation and lowering returns to depositors. This focus on the yuan has left the mainland exposed on a number of fronts. The economy's heavy dependence on exports means growth could be severely undermined either by a fall in external demand, possibly connected to a decline in the US dollar, or to an upsurge in protectionist sentiment, especially in the United States.