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China fears the great convertibility test

No-one disputes that China's growth rate needed reining in. While investors worry over the possible consequences of a sharp slowdown, most economists believe that, contrary to global historical precedent, the Chinese authorities might have pulled off the trick of a relatively painless cool-down. But serious structural flaws in the economy remain and make China a perilous place to invest.

CHINA'S ECONOMY HAS set so many records that it is easy to become blasé about stratospheric growth rates and unprecedented investment levels. After all, are not such abnormalities an inevitable by-product of the world's fastest-growing economy?

Rather as with the much-trumpeted new economy that supposedly explained the internet valuation excesses in the US, economic reality, it seems, is often set to one side so that we can marvel at China's economic miracle.

As China euphoria among foreign investors gathered pace over the past two years, so structural imbalances have emerged as everyone tried to board the China growth train before it left for good. So high has the level of domestic and foreign investment in China become, for example, that it accounted for much of the recent growth in GDP.

"Last year was the most imbalanced period of growth in [recent] Chinese history," says Desmond Supple, managing director and chief strategist for Barclays Capital. "We saw GDP growth of 9.1% but investment 70% by investment is not healthy. "The level of investment is unsustainable," Tim Condon, managing director and chief economist Asia for ING Bank, says. "On the face of it, if it keeps up, the entire economy will only be made up of investment.

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