In the past few weeks China has taken tough action to halt a property bubble, and is winding back its massive investment in infrastructure, which had driven up demand and prices for metals.

This would be a second blow for Australia's mining sector, which is battling the Rudd government's proposed super profits tax.

Inflation and mounting debt also worry China's policymakers, and its steelmakers are facing second-half losses.

"April data will likely show that the momentum of China's economic activity has peaked," UBS economist Wang Tao warned.

"Industrial production, retail sales and fixed investment all remained buoyant in April, helped by strong construction activity, recovering exports, and surging auto sales.

"However, sequential momentum has peaked and slower growth is expected in the coming months," she said.

Australia is becoming ever more dependent on the Chinese economy.

Last year China sealed its place as our largest trading partner with two-way trade worth $83 billion.

Then, in December, China become our largest export market, finally overhauling Japan.

These facts are unlikely to change in the foreseeable future.

India will continue to rise and at some point overtake China in population, but it is far more self-sufficient than its Asian rival in resources such as iron ore.

So what happens next?

China's economy is set to trundle along at a fair clip for the rest of the year, with estimates of annual GDP growth running between the official target of 8 per cent and as high as 11 per cent, but the prevailing view is that things will start to slow down in the second half of the year.

"Over the next few months, we expect the slowdown of investment and new construction in large cities and in the high-end property market to be partially offset by the push for mass-market and public housing construction, as well as the acceleration in urbanisation in inland regions," Ms Wang said.

"Nevertheless, a slowdown in property construction and some price correction seem inevitable at this moment.

"We see overall construction activity growing by 10-15 per cent for the year as a whole, but do expect it to turn negative year on year sometime in the second half of 2010."

In mid-April China's State Council -- often referred to as the cabinet -- announced steps that were tougher than the market expected to rein in the property market.

"The government's property-tightening measures were aggressive and will help reduce risks of a short-term bubble," Royal Bank of Scotland China economist Ben Simpfendorfer said.

Deutsche Bank economist Ma Jun warned that many investors and developers remained complacent about the outlook for the property market.

"We think transaction volumes may fall as much as 60-70 per cent in the coming weeks from the mid-April level versus our previous expectation of a 50 per cent drop," Dr Ma said.

"A larger than expected fall in property transactions would negatively affect fixed-asset investment, demand for commodities, and sentiment on banks."

Local government and ministries are still formulating detailed guidelines. So far only Beijing and Qingdao have announced city-specific measures, which are considered stricter than the national ones.

"However, they do not address the major underlying cause of the bubble -- the country's large pool of trapped savings," Mr Simpfendorfer said.

"Speculators might yet shrug off the measures and the risks of a medium-term bubble remain real."

There are persistent fears of inflation.

"The recent trend of the PMI's input price index suggests to us that the producer price index will likely rise to a surprisingly strong 11 per cent versus the market expectation of 7-8 per cent by June-August," Dr Ma said.

"We think CPI inflation will also rise to close to 4 per cent by June."

Mao Yushi of the Unirule Institute of Economics, an independent research organisation in Beijing, warned that China's economy faced a dilemma. "It's very likely China will have inflation this year, because too much cash was issued last year. Though that has slowed down now, inflation is still inevitable.

"The government has two concerns. On the one hand, it worries about inflation. On the other hand, it worries about economic growth falling.

"Different government departments also differ in their opinions. Zhou Xiaochuan of the central bank thinks to control inflation is the main priority, while the government might think maintaining growth is more important."

Opinions differ about the inflation threat.

According to Li Yining, director of the social science department of Beijing University, "there is only a pre-warning of inflation -- we can't say inflation has arrived".

"China should keep loose monetary policy to solidify the foundation for economic recovery."

But like most observers, Dr Ma said that GDP growth should slow due to weaker infrastructure and fixed-asset investment and property transactions in this quarter and the next.

"A combination of rising inflation and slower activity could lead to a fear of stagflation towards the end of the second quarter," he said.

Another area of concern is the amount of local government debt built up over the past two years as part of the government's spending binge, which cushioned the country from the global recession.

China's public finances are notoriously opaque, but estimates put lending to local government at somewhere between 6 trillion yuan ($1 trillion) and 11 trillion yuan.

"An IMF study of banking crises in 37 countries puts the median peak in non-performing loans at 22 per cent of total loans." said Mr Simpfendorfer.

"So, if only half of an estimated 6 trillion yuan of listed investment companies' debt results in non-performing loans -- the most optimistic forecast -- this would still represent an already sizeable 10 per cent of total loans, with the actual figure likely to be higher than this estimate.

"Problems between the central and local governments have yet to be solved. This is a challenge as China looks increasingly to domestic demand, especially in the interior provinces, as the economy's main growth driver. To move forward, China must find a sustainable way to fund local governments."

For Australia, China still looks rosy in the short term, with March copper and iron ore imports surging towards last year's highs.

There was better news for miners during the week, as China's largest steelmaker, Baosteel, admitted it was buying iron ore on a short-term contract basis.

Sourced from www.theaustralian.com.au