Last year, China's economy almost certainly overtook Japan's and became the world's second-largest after the US.
There is a good argument to be made for the idea that China is driving much of current global economic growth, and certainly Australia is riding piggy-back on this growth engine.
But opinions on the sustainability of China's economic expansion have recently acquired a more pessimistic tone and many now say growth in the world's most populous nation will falter in 2011, leaving Australia to take a step back as a result.
Wilson Asset Management (WAM)) Capital, which last week reported interim portfoloio growth of 17 per cent, was particularly negative on the outlook for China this year.
"China, the engine for above average world growth during 2010, may not provide such a buoy for the local economy in 2011," the company said in a release to the Australian Securities Exchange (ASX).
WAM Capital is concerned about inflationary pressures that have so far ignored the monetary brakes being applied by the Chinese government.
"As a result, China will be forced to keep raising interest rates, which should eventually ease inflationary pressures and ratchet down economic growth from over 10 per cent to possibly as low as 7 per cent."
"In turn, the much loved Australian resources sector, may find it difficult to repeat its stellar performance of last year," WAM Capital said.
The asset manager is not alone in its fears. Predicting a Chinese economic downturn has become almost a growth industry in itself.
But the doomsayers give Premium China funds management executive director Simon Wu a strong sense of déjà vu.
"Early last year, the fear again was that the economy was running too fast and, therefore, that the government will come out and say: 'I want the economy growing at 8 per cent.' And it turns out that the economy is growing more than 10 per cent: double digits."
"Mark my word, the Chinese economic growth will not drop below 8 or 9 per cent. I said that last year and everybody still said: 'Oh China is slowing down.' We are a country of people that love to scare ourselves to death," Wu said.
Wu is of the opinion that a strong indication for continued economic growth in China is the consistently high growth of retail sales there.
"Retail sales growth has been consistently between 17 and 18 per cent since July 2010 until now. That is telling us the economy is safe. The Chinese consumer is not saving 60 per cent of their income, they are saving something like 40 per cent and spending more money," he said.
The World Bank's forecast supports Wu's argument. It expects the Chinese economy to grow by 8.7 per cent in 2011.
Strong Chinese growth is good news for the Australian economy, but economic growth does not guarantee large equity gains, and the case for investing in Chinese equities remains precarious.
In 2010, the Chinese Shanghai Composite index fell 13 per cent, while GDP expanded by 10.3 per cent.
Hong Kong-based Aberdeen director and head of Chinese equities Nicholas Yeo said that the mainland Chinese stock markets are still battling with a number of problems:
"The market is a poor reflector of fundamentals and is usually driven by sentiments," he said.
"Moreover, mainland-listed companies tend to score lowly in terms of corporate governance and paying attention to minority shareholders' value. Hence, impressive macro numbers do not translate into investor returns."
"We prefer to gain exposure to China via Hong Kong where the quality of companies is higher, especially the local Hong Kong companies that have increasing exposure to mainland China."
"The Hong Kong stock market is also a more mature one with better regulatory oversight and participants that mainly consist of international funds. Therefore, it is a more rational market with greater emphasis placed on individual company's fundamentals," he said.
"We are positive on Hong Kong-listed equities. It is harder to predict performance for mainland China's domestic markets because of the reasons stated above."
Yeo is also positive on the long term perspective of the Chinese economy.
"Beijing's commitment to promote private consumption and downplay investment is particularly encouraging," he said.
This should mean Australia's future is also relatively safe, but Yeo does have reservations.
"The rate of growth is likely to reduce as the outlook for exports is challenging due to problems in the developed world. [But] the magnitude of slowdown may not be significant if domestic demand managed to take up the slack," he said.
