By Li Hong, People's Daily Online

After a short span of strong recovery from a sharp downturn in the past few months, China's economy seems increasingly slipping back to a difficult land, or, some say, an actual dilemma. The policy-makers and their top advisors are bewildered to find out that a growth fired solely by government investments and easy credit, while not supported by private consumption, is simply not sustainable. Developed countries cannot do it, either China.

Worse, the lifting-off of sluice on credit control, in a rush to combat a lending crunch resulting from the global financial crisis, has caused a flooding of the economic system with over-blown liquidity. It has since inadvertently led to blockbuster runs in equities, and is certain to generate graver risks to price bubbles of major commodities in the coming quarters.

When prices of grain and meat, gasoline and vehicles, house and cement all rise, it is hard to avert a cycle of spiraling inflation. And, when inflationary pressure is coupled with low consumption on the part of the consumers, which translates into retreating economic activities, the nightmarish word "stagflation" will visit China and cobble all of us.

Getting rid of it in a quick manner? Not that easy. We must have heard a "lost decade" and a subsequent evaporation of Asia's economic powerhouse in Japan.

Recognizing the hidden perilous dangers, authorities in Beijing has lately taken some minor measures to curtail them. Though the central government did not trumpet it that it is going to reverse course, the market has detected and felt its pinch of a de-facto policy revision. Stocks in Shanghai and Shenzhen, two economic stars in China, have been on a tailspin and slumped by 25 percent in August. The once-idle money, lured back to equities by a bull run earlier this year, is heading for the door.

Even if President Hu Jintao and Premier Wen Jiabao have promised no imminent economic policy shifts, the People's Bank of China and the Banking Regulatory Commission, urged by a powerful group of economic pundits, have warned the country's lenders that they are facing rising danger of bad debts in 2010, as a result of their releasing 7 trillion yuan more of credit line in the first six months this year. The watchdogs have demanded the bankers replenish capital to solidify fund adequacy.

It is learned that the Shanghai Pudong Development Bank and Shenzhen Development Bank have decided to put the full brake on credit in August. Other big lenders have drastically cut back on lending.

It makes sense that a cooling of the stock and housing markets may wind down many investors' aspiration of bagging quick money, and have a dampening effect on commodity prices, as consumers have to snap shut wallets. However, a crash of equities means diminishing pockets and anemic consuming ability. Currently, Chinese economists are seriously worried about a flattening-out of private consumption, plus a dimmer prospect of exports gains in the near future, will force the economy on a downward road.

And betting that Wall Street will keep its momentum, produce more profits and reinvigorate American households' appetite for Chinese-made goods, could proved to be abortive. Volatility will come back and the rally will end, as the Dow Jones is up 45 percent from its March lows, and the S.&P. 500 is more than 50 percent higher. And, the biggest economic recession since the Great Depression has hit Americans and Europeans hard that they have dramatically increased saving money in the bank.

Any effective ways out of the dilemma for China? Independent economist Andy Xie pointed out two: To take the helm of housing industry from the private property developers, provincial-level governments are to set the price for land, and employ developers to build apartments and houses. Xie said that the housing price could be reduced by more than half from the present staggering level, and another boom of real estate is ensured in China. With money saved from paying substantively lowered housing prices, Chinese will be able to spend more in clothes, electric appliances, cars, restaurants, and travel.

Another measure sounds even more audacious and bomb-shelling: To distribute state-owned shares of all government-run businesses to Chinese households. The rationale is that since the proprietors are public, not the government, as evidenced by China's socialist system, it is okay for all the families to obtain share returns. Only after the public have access to more cash, their consumption can take a shooting-up.
I agree that only after the blood-sucking private property developers are reined in, and the notoriously low compensation of Chinese workers is changed, could the country achieve another 20-30 years of rapid economic growth.