The second concern is that property construction could slump. A wave of newly-completed property is set to enter the market in the coming months, which could dampen developers' appetite for new projects, particularly when policies implemented over the past year to slow price rises remain in force.

There is no sign of any slowdown in construction activity yet, perhaps because government efforts to increase the supply of affordable housing are offsetting a slowdown at the market's higher end. More generally, the risks of a crash, as opposed to a cyclical slowdown, have diminished as property price inflation has slowed to single digits compared with double-digit growth in average wages.

In sum, fears that China faces an imminent hard landing are almost certainly misplaced. The recent slowdown nonetheless illustrates some important and potentially worrying trends. Most obviously, China's economy and its demand for resources should not be expected to grow forever at the rates of the past few years.

Less appreciated are the challenges that China still faces in navigating a smooth passage in the years ahead. These may not trigger a sudden hard landing but could result in a prolonged period of disappointing growth. For example, the weakness of consumer spending in the last few months underlines that the economy continues to be reliant on investment.

Indeed, a final reason to believe China can avoid a sharp slowdown in the near term is that, with inflation likely to be falling soon, the government will have room to loosen its policy, if needed, in the second half of the year. Loosening would probably take the form of stronger lending by banks, further entrenching investment as the key driver of growth.

The risks associated with investing an ever-larger share of national income are growing. Enterprises invest to be able to sell more in the future at home and/or abroad. But if, in the long run, consumer demand does not grow as rapidly as output, then those enterprises will struggle to survive. Industry will be left with overcapacity and banks will find themselves sitting on a pile of unrecoverable loans. Either outcome would hobble broader economic growth.

Relying on foreign consumers is not a realistic long-term plan. That's why the government agreed long ago, at least in principle, that more must be done to encourage Chinese consumers to spend. Rebalancing has been a central policy objective for a while and is the key theme of the 12th Five-Year Plan (2011-2015).

But the government seems to be struggling to realize that goal. The share of overall spending in China coming from households has fallen without a break for 10 years, and continued to fall while the 12th Five-Year Plan was being drafted. If China fails to make a start on rebalancing soon, there is a rising risk that its growth will slow down much more than generally anticipated in the years ahead.

The author is a senior China economist at Capital Economics, a London-based independent macroeconomic research consultancy.

(China Daily 05/31/2011 page9)