Soaring Dragon: The Chinese economy grew 10.3% last year

Soaring Dragon: The Chinese economy grew 10.3% last year

China. A land of opportunity and panacea for all that ails the global business community or an economic time-bomb ready to explode the World's fragile recovery and plunge us back into a second crisis in so many years? Whether it's pundits on the television or economists in the newspapers, no one can seem to agree.

One thing seems certain: China is now a pillar in the growth plans of many of the world's largest consumer goods groups and retailers. Last week, Carrefour reported that its full year was boosted by solid growth in Latin America and Asia, with sales up up 12.5% in China over the final quarter. Tesco's recent disappointing Christmas performance in the UK was in part buffeted by growth at an international level, where China was again singled out for praise. M&S continues to open stores in the country too.

Luxury goods firm Burberry, meanwhile, saw its same-store sales grow 30% in China last quarter, having completed the transfer of its wholesale operations in the country to retail in September last year. Meanwhile, it has further capitalised on demand by opening a flagship store in Beijing, showcasing its most advanced digital in-store technology.

Sporting goods giants Nike and Adidas Group have also upscaled their ambitions for China in recent years, spurred on by marketing opportunities at the Beijing Olympics in 2008. Indeed, Adidas is planning 2,500 new stores in China over the next three years as part of its “Route 2015” business plan.

Figures out today should have been encouraging then. China is already the World's second largest economy. And Chinese authorities said the country's economy grew 10.3% in 2010, marking the fastest annual pace since the onset of the global crisis. According to estimates, China could overtake the US to become the largest economy in the World by the 2030s.

But whilst the West struggles to take any step towards growth, the fear for China is that it is close to overheating, particularly with regards to inflation, which was running at 4.6% and a credit boom that the government seems to be struggling to curb.

These fears have prompted a number of hedge funds to set up distressed China funds. As one academic was quoted in the UK media this week as saying: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.”

Even Goldman Sachs, for so long a fierce supporter of China's prospects and the company that invented the BRIC acronym, has taken a dimmer view of things this week.

Tim Moe, the bank's chief Asia-Pacific strategist said: "To be frank, we may have held on too long to our overweight position in China last year. We have decided that discretion is the better part of valour and have tactically reduced our weight. Asia is not in the sweet part of the cycle. The longer-term picture of Asia outperforming the US is taking a breather.”

So far those betting against China's continued stellar performance have yet to be proven right and the hope is that China's huge population will continue to fuel demand. Growth figures for the fourth quarter defied expectations of a slowdown, rising to 9.8% from 9.6%. And inflation eased a little to 4.6% in December from a 28-month high of 5.1% the month before. Inflation for 2010 as a whole was 3.3%.

But the Bears only argue that the longer China's fall is postponed the heavier it could be. And whilst inflation rates are behind this time last year, they are still near historical highs and well above where is healthy. The irony is that whilst the growth levels reported today may be welcomed by those presently looking for short term gains in the market, they may finally convince the Chinese authorities that now is the time to make a determined effort to cool the economy down. The alternative of a credit and inflation boom left unchecked could be far more unpleasant.