Slip-ups are no surprise, given the vast reforms that country is going through.

Bouts of Sino-centric angst are liable to become a recurrent feature of global financial markets.

If the Chinese economy is heading, not for a nice smooth soft landing, but for something more undercarriage-buckling, it would not be surprising, given the fundamental and far-reaching economic reform agenda the Government is pursuing.

As China has contributed about a third of global economic growth in recent years, few are immune from the effects of its slowdown.

The International Monetary Fund, in its annual report on the Chinese economy published two weeks ago, forecasts gross domestic product growth to slow to 6.8 per cent this year, from 7.4 per cent last year and 10.6 per cent five years ago.


It is not just the slowing rate, but the composition of growth that matters. China's growth is famously top-heavy in investment spending and light on consumption.

Investment in infrastructure and real estate are good things you can have too much of, especially when they are funded by rapid credit growth.

"The high level of credit could weigh on China's growth and financial stability," the IMF warns. "Cross-country evidence suggests that episodes of similar credit booms often ended abruptly, accompanied by financial crises or prolonged slowdowns in GDP growth. This risk is still low in China, but it is growing."

Years of very high real estate investment have resulted in considerable oversupply, it says. Inventories of residential property awaiting sale represent more than two years' demand nationwide - and three years' demand in the smaller (by Chinese standards) cities.

It is the opposite of Auckland's problem. In a bid to engineer an orderly unwind of that oversupply, the authorities last March introduced a package of measures, including reducing land supply in cities with excess housing inventory. On the demand side, they increased the loan-to-value ratio for second mortgages, from 40 per cent to 60 per cent, and shortened the minimum period for exemption from housing sales tax from five to two years of residency.

Meanwhile, the steep rise in corporate investment, especially in state-owned enterprises, after the global financial crisis has been largely financed by credit. "But the efficiency of investment has been falling, with a commensurate fall in corporate sector profitability," the IMF says.

None of this is news to the Chinese authorities, of course.

Their overarching policy goal is the rebalancing of the economy: a shift in its centre of gravity from investment to consumption, from exports to domestic demand and from goods to services.


This is not a swift or easy process but they can point to evidence of progress in the form of rising household incomes and retail spending, and continued expansion of the service sector.

The reform agenda also involves a more radical shift from a dirigiste or command model, where the Government decides where resources will be deployed, to one in which "markets play a decisive role".

But markets, as has been brutally demonstrated to equity investors recently, are prone to overshooting and correcting.

Liberalisation of China's financial system is still a work in progress. Some aspects of the way it does things are reminiscent of Rob Muldoon's New Zealand, like varying banks' required reserve ratios as a mechanism for conducting monetary policy, capital controls at the border and a managed exchange rate.

Administrative controls on interest rates have been relaxed but not altogether removed. There is still a ceiling on interest rates paid to depositors. The IMF advocates its removal and also moving to a fully floating exchange rate within two or three years.

While China is moving in the direction of an open, market-based financial system, it is doing so gingerly and not in the bull-at-a-gate fashion we experienced in the 1980s.

Pressing ahead with the reform agenda is essential, the IMF argues, even if it means weaker growth in the near term.

A no-reform scenario in which the Government tried to stabilise growth at 7 per cent would eventually fail, as investment delivered diminishing returns and productivity growth waned, while an ageing population is projected to lead to a shrinking labour force from 2020.

Without further reforms, growth would gradually fall to around 5 per cent in 2020, the IMF reckons, while debt ratios steeply increased.

A complicating factor is that part of President Xi Jinping's reform agenda is a crackdown on corruption.

Quite apart from any equity considerations, this makes economic sense. Allowing that greedy tapeworm to grow in an economy's entrails is seriously debilitating, as any number of countries could attest.

But cracking down on it creates a situation - and not for the first time in China's long history - where many of the mandarin class, charged with implementing policy, have personal interests and priorities which do not necessarily align with the emperor's in Beijing.

So China's policymakers are pulled in opposite directions by structural and cyclical considerations.

Credit growth needs to be reined in for the country to transition to slower but safer and more sustainable growth. Right now, however, monetary policy is being eased to counter an avalanche of selling on the stock exchange.

All of this is playing out in the context of a world economy, much of which is still heavily medicated in terms of monetary policy settings. The European Central Bank and Bank of Japan are printing money for all they are worth and while the US Federal Reserve has stopped its quantitative easing, it has yet to begin raising interest rates from the emergency levels it cut them to during the global financial crisis.

The flood tide of cheap money has inflated asset prices all over the place (including Auckland's housing market), but as the tide turns and ebbs we will get to see, in Warren Buffett's famous phrase, who has been swimming with no trunks on.

See the IMF document here