Wang Qing, chief economist for greater China at Morgan Stanley, says things are not all bad for this part of the world as the US appears to be slipping into a recession.

ôThe greatest risk China is facing is not a US recession,ö he says. It is a possibility that the Chinese economy will overheat. Right now, a US-led or G3-synchronised slowdown could help rein in the Chinese economy better than the measures that policymakers may put in place.

Wang believes that China is coming into a late cycle once again. It is now susceptible to overheating, as history has shown in 1992, 1998 and 2003. Investments tend to peak in the year the government changes hands. The present regime will expire in March 2008. This time, the economy is particularly susceptible as it is enveloped by low interest rates, strong corporate earnings and an undervalued renminbi.

"It is not recession that China is fighting. The Chinese government at this time is preventing its economy from overheating and reining in inflation. These tasks will supersede other objectives. But donÆt expect the regime to release hard-line policies," Wang says.

ôWe expect a continued muddling through approach in policy implementation in 2008,ö he says.

The government needs to prioritise, he says.

With social imbalances, the government needs to keep the economy growing to create jobs for the mass-migrating rural population. Meanwhile, it also needs to entertain state-owned enterprises, which often have high audiences among the policy-making circle, to keep the financial performances of these banks and businesses going and maintain stockmarket momentum.

Instead of taking the hard line, Wang believes the US recession will come in handy for China. The mainland will be able to take advantage of the US consumption slowdown. Hopefully, this will narrow down the trade surplus and in turn, slow down the growth of monetary supply from 18% to 16.5% without the Chinese government intervening directly.

ôOur forecasts envisage a modest rebalancing in growth drivers in 2008, relatively weak exports to be offset by sustained strong domestic demand,ö he says. If that is any help in reducing the current account surplus, the monetary supply û- another inflation driver -- should become manageable, he says.

Other than decreasing monetary supply in the system, the policy will allow unsold goods to flow back to domestic markets, which eases price pressures from increased supply. While this rebalancing will impact equity markets over the short term, Wang believes it will keep the economy sustainable over the medium to long term.

Wang says opponents to aggressive rate cuts and renminbi revaluation are still dominant in the present regime. Therefore, investors should not expect any more than two rate cuts, while major revaluation will not come into effect until 2009 -û not unless CPI inflation goes completely out of control.

ôItÆs so much more than economic policies. Sometimes these are really political issues,ö he says.

ôIn adapting to a weak external environment, [the Chinese economy] will likely be able to realise a welcome rebalancing that would otherwise be unachievable, thus boding well for a sustained and robust expansion over the medium term,ö he adds.