On the face of things, the economic figures released by Beijing yesterday give a strong impression that China's economy is gliding smoothly towards a remarkably soft landing. Overall gross domestic product grew by 9.6 per cent over the year to the third quarter. That's fast certainly, but the growth rate actually moderated a touch from the 10.3 per cent rate recorded in the second quarter of the year, thanks presumably to the government's cooling measures introduced back in April. What's more, the mix of growth appeared to be getting more healthy. The expansion of investment in fixed assets - property developments, factories and the like - softened to 23.1 per cent in the third quarter from 25.1 per cent. Industrial output growth eased back to 13.5 per cent from 15.9 per cent. In contrast, growth in retail sales accelerated, hitting 18.8 per cent in September, up from 18.4 per cent the month before, creating the impression that the economy is successfully rebalancing away from capital intensive investment and manufacturing and more towards domestic consumer demand. Inflation pressures remain a worry. Consumer prices rose by 3.6 per cent over the 12 months to September, well above the government's target rate of 3 per cent. Food inflation, meanwhile, shot up to 8 per cent from 7.5 per cent in August; a painful increase in a country where many people spend a third or more of their income on food. Yet observers drew comfort from the belief that much of the increase was seasonal, and pointed to this week's surprise quarter-point increase in interest rates as evidence that the authorities are on top of the threat and are determined to anchor price expectations. Some fretted that the rate hike might backfire, with higher returns luring greater inflows of hot money from abroad which would exacerbate overheating, but these fears are overblown. Speculators are more likely to be deterred by the dampening effect of higher rates on property prices than they are to be attracted by an extra sliver of interest on mainland deposits. In any case, last week's increase in banks' required reserve ratios shows the authorities are prepared to mop up excess inflows simply by ordering banks to set more of their deposits aside as reserves. As a result, the picture is of an economy running neither too hot nor too cold but just about right; the treasured 'Goldilocks scenario'. Unfortunately, though, that picture may be misleading. Despite its size, the Chinese economy is at the mercy of international conditions, and international conditions are looking increasingly unfavourable. Eric Fishwick, head of economic research at Hong Kong-based brokerage house CLSA, argues that large overhangs of debt and unsold properties will continue to suppress activity in the United States next year, even as the investment cycle driven by corporate technology replacement runs out of steam. Meanwhile in Europe, austerity measures will depress growth in the current account surplus countries which until now have been the driving force behind European demand. As a result, Fishwick expects China's massive manufacturing for the export sector to slip back into recession next year as developed world demand dries up once again. In turn, that will have a knock-on effect on the domestic economy, as exporters scale back their capital investment programmes. The impact could be so severe, says Fishwick, that by mid-year Beijing will be forced to launch a fresh stimulus package of government investments. Much of the effort will be focused on programmes which support rebalancing, like the construction of low-cost housing. 'But the fear is that Beijing will have to resort to a similar sort of stimulus - albeit on a smaller scale - as in 2008 and 2009,' he warns. In other words the authorities will open the credit taps, ordering the banks to lend to all and sundry to boost activity, while holding down the yuan against a weak US dollar in order to promote exports. That might support growth rates in the short term. But the incremental benefits of further investment packages will inevitably deteriorate. Much of the capital lent to finance another investment splurge would be misallocated, if not simply misappropriated. Many of the projects funded would be wasteful, if not outright fraudulent. And the inescapable upshot of another burst of lending would be a weakening of the banking system's capital base and a sharp rise in non-performing loans. Meanwhile, continuing to hold down the yuan would only exacerbate trade tensions with the US and Europe. So although yesterday's data may have appeared to portray an economy where things are going just about right, Goldilocks is not out of the woods yet.