Is China overheating?

China's economy is now running close to full tilt, but growth is not accelerating substantially, nor is there an imminent risk of overheating.

A GDP growth rate of 11.9% year-on-year for the second quarter, up from 11.1% for the first quarter, is prima facie evidence of an economy that shows no signs of cooling down. But there are signs that China can live with such breakneck growth:

• The dragon is still a good all-rounder. GDP growth was supported by a robust performance  in all sectors of the economy -- investment, consumption and net exports.

• Inflation pressures are still relatively modest. Consumer price inflation came in at a higher than expected 4.4% for June, but the government believes that this is a temporary phenomenon driven largely by higher pork prices.

• Monetary policy is being gradually tightened. Measures designed to improve investment efficiency, boost consumption as a share of GDP and moderate the swelling of the trade surplus may not be enough to placate China's US and European critics, but it shows that the Chinese leadership understands the dangers of overheating and 'irrational exuberance'.

A good structure

Beijing can put things right without taking its foot off the gas. Tightening monetary policy -- via interest rate rises, a strengthening of its renminbi currency against the dollar and changes to bank reserve ratios -- can theoretically be achieved without pushing the overall GDP growth rate below 10%. Such moves will improve the structure of the economy without necessarily reducing the overall growth rate.

The "B" word

Economists have been studying what happened to the Japanese 'bubble' economy in the 1980s, where the sharp rise in the yen pushed real estate and stock prices to unrealistic levels. An appreciating renminbi could make the Chinese bubble worse.

The stakes are high. China's rapid growth has been hauling Japan and other Asian nations into recovery in recent years. If the dragon suddenly lost its puff, the global economy would feel the fallout. Beijing understand that the world is counting it to get economic policy right.