Can China's Economy Stay Strong?

On the monetary side, too, Beijing has weapons in its arsenal. "The good news about China right now is that the banks haven't lent particularly aggressively in recent years, and the reason is that the government has stopped them from doing so," says Cavey. "China has a very huge reserve requirement ratio in the banking sector of 16.5%, and if the government wants to support growth, it is easy to cut that reserve requirement ratio, and I think these kinds of monetary policy measures will be used to support growth going forward."

Much of the monetary stimulus is aimed at the manufacturing sector. "What the government has been trying to do is to begin to relax bank lending to some of the manufacturing companies, to help offset some of the slowdown," says Chum.

However, monetary stimulus is not an open-ended, continuous course of action, says Cavey. "Obviously they will come to an end in this process, and if exports in the rest of the world don't start to pick up, and this monetary policy stimulus has already happened, then probably growth in China will start so slow more sharply. But while China still has ammunition, I think it is less likely that growth will slow a lot."

Inflation

Ultimately, inflation is the wild card that could cause the most damage to China's economy. If the consumer price index (CPI) rises too sharply, the government would not be able to use its policy tools to kick-start economic growth, because the stimulus would cause inflation to rise further. "If inflation is still high, there is limited room to stimulate domestic demand, because if you stimulate domestic demand, that may raise inflation," says Peng. "But now inflation has come down quite significantly, so that is less of a concern."

Inflation is indeed falling: The CPI peaked at 8.7% in February, year on year, before gradually retreating to 6.3% in July and 4.9% in August. With the fall in commodity prices, inflation is likely to fall further, say analysts. That leaves Beijing free to inject more money into the economy, as it is now doing, either by fiscal means -- tax cuts or infrastructure spending -- or by loosening credit restrictions and lowering interest rates.

"If inflation does pick up, then China has to take more aggressive action to slow down growth," says Mr. Cavey. "I think that's the ultimate risk here -- that we see more inflation coming through -- but that doesn't seem to be a big risk in the next six months or so."

If GDP growth were to drop below 9%, the government would move aggressively to support the economy, says Peng. "At that level, they would be really, really concerned and would take quite drastic measures to stimulate demand."

The most likely scenario, according to some, is that China's economy will continue to grow at 9% or so for the foreseeable future. "In my opinion, China cannot sustain double digit growth," says Zhuang, of the Asian Development Bank. "In the next few years, annual growth will most likely be around 9%, with a (CPI) inflation rate of about 5%. It will be different from previous years, when growth was 10% to 12%, and inflation was very low."

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