It's hard to say if the Chinese economy will land softly this year, but either way, it is a big concern around the world.
Central government statistics for the second quarter seem to bode well. The growth rate for fixed-asset investments was 16.8 percentage points lower than that in the first quarter. Other indices, such as consumer prices and money supply, largely took a favorable turn after a dangerous surge in previous months.
Wang Xiaoguang, a senior researcher of the National Development and Reform Commission, and Tao Dong, chief regional economist of Credit Swiss First Boston, are confident of a soft landing provided real estate prices don't slump.
But one question comes to mind. If the economy does get the desired soft landing, what happens next?
The central government may relax macroeconomic controls a little bit, so as not to stifle enterprises, especially private firms.
But will investment in many sectors such as raw materials, power, and real estate stage a comeback once money supply is eased and administrative measures relaxed? This is a dilemma that has haunted the Chinese economy for decades.
Government regulations are necessary when the market fails. But why doesn't the invisible hand work on many occasions?
Blame several local governments and state-owned enterprises, which have soft budget constraints - they can afford to invest with little regard to returns.
Local governments' excessive involvement in economic activities is behind much distorted market behavior. The case of Jiangsu Tieben is illustrative. A private steel company, Jiangsu Tieben initially planned to expand its production capacity moderately, but ambitious officials in Changzhou, Jiangsu Province, persuaded it to expand quickly. They bulldozed large plots of farmland and drove farmers from their homes to make space for factories.
Officials are often judged by the amount of GDP rather than by the quality of GDP.
In the eyes of many local officials, who are seldom appointed for more than two terms, they are all dead in the long run anyway.
In a word, studying the behavior of local officials helps shed light on why a market economy sometimes bogs down. State-owned enterprises behave in a similar way.
When the shortsighted behavior and soft budget constraints of local governments and state-owned enterprises marry a labor intensive economy, over investment in real estate, raw materials and power is only natural.
And when each and every city or county encounters the same task of creating jobs for many, wasteful investment in similar projects will occur. For example, most cities have designated real estate as their pillar industry.
A prosperous real estate market should be the result - not the cause - of a strong economy.
It is time local officials are judged on long-term goals instead of superficial, short-term achievements. It is also time the economy finds new growth engines outside labor-intensive sectors.
Debates on whether the economy is overheated are ongoing.
Economists have different opinions. Song Guoqing and Li Yining, both professors at Peking University, say the economy is growing at a sustainable pace. Others such as Xu Xiaonian, professor of China-Europe International Business School, insist that the economy is already overheated.
The divergence mainly results from the difference in the way "overheated" is defined.
Even though the economy may not have overheated yet, there is still cause for concern - especially when officials and inefficient state-owned enterprises can do what they want.