Can investors continue to rely on Chinese growth?

Sure, China's economic growth is impressive: the world's third-largest economy surged 10.7% in the fourth quarter of 2009. Moreover, a surge of 11.1% in the first quarter of this year is being predicted. Full year GDP-growth for 2009 is estimated at 8.5%. It should be noted though that these (quarterly) GDP-figures are based on yearly comparisons with year-earlier periods, and thus may be misleading.

During those quarters the Chinese economy grew at the slowest pace of expansion in almost a decade. According to Premier Wen Jiabao, China will more closely track changes in economic indicators from month-to-month instead of year-earlier comparisons. These year-on-year comparisons might erroneously lead people to believe that the Chinese economy is already overheated.

A massive Chinese stimulus package of four trillion yuan ($585bn) kick-started the (global) economy during 2009. Increased demand for basic materials and oil drove commodity prices higher. Gold for instance recently hit an all time high of $1,220, while Copper surged more than 150% in the last 12 months and oil prices more than doubled. Investors fear that these impressive measures will also (eventually) lead to inflationary pressure. A logical step will be that the Chinese authorities will tighten lending standards and have to raise interest rates, trying to cool down the economy and avoiding bubbles.

Many questions can be raised concerning the creation of bubbles, one of which is Chinese real estate: last year, in Shanghai, prices for high-end real estate were up 54% through September. In November alone, housing prices in 70 major cities rose 5.7%, while houses to be built nationwide rose sharply, surging 194%.

A parallel with other bubble markets, like (the sub-prime) housing market in the United States can be easily drawn. We know to what devastating consequences a real estate market crash, as the US has witnessed since 2007, can lead: for the last two years the global economy is coping with the worst recession in over 70 years.

China sees itself in a 'catch 22-situation': restricting monetary policy too fast and too much could hurt economic growth. Providing the market with too much easy money could, conversely, inflate several bubbles which will burst sooner or later. When bubbles burst, prices will implode, as we saw in stock and oil prices in 2008.