Will the epicenter of the next financial crisis germinate in China? Will the world's second largest economy turn into a nightmare for investors?

Will real estate - the bulwark of the economy - collapse under oversupply? Will Chinese banks totter under a massive credit bubble? These are the grim questions for 2012 as analysts rush to pre-empt a crisis that may befall China.

In some ways, 2011 was a worse year than 2008 for the commodities as well as stock market. The Shanghai Composite was in a steady downward slide since last April, shedding over 27 per cent of its value since then.

Retail investors booked an average loss of about RMB 40,000 in equity markets of Shanghai and Shenzhen, with a total of RMB 6 trillion in market value disappearing. The Chinese market functioned more as a fund-raising platform, with jittery investors eyeing quick returns. Enterprises raised a record RMB 825 billion in IPO and new shares which, many say, served only to weigh down the indexes.

Real versus bubble

To soothe ruffled investors, the China Securities Regulatory Commission, of late, has been harping on the large number of "strong enterprises" operating in China's "real economy". After all, the big worry emanating from the country is a manufacturing slowdown especially in the second half of 2011.

The effect of China's aggressive stimulus program, to counter the 2008 recession, has petered away. An unwelcome dip in domestic demand, despite all-out attempts to increase consumption, is a double whammy coming on top of shrinking export markets of the West.

A bigger danger comes from the build-up of a massive credit bubble. In recent years, the government showed increasing dependence on currency growth. Compared with the muscle of its real economy, China's monetary supply has burgeoned in a twisted sort of way over the past few years.

Newly increased credit volumes now amount to RMB 8 trillion every year, eight-fold the average RMB 1 trillion from 1998 to 2002, while bank assets have increased to RMB 110 trillion over the past 10 years. This flood of liquidity went mostly into the property market and not as much to agriculture or small and medium enterprises.

Sharp shift

But if there are alarm bells, there is a sense of administrative confidence too. By all indications, China is ready to make several policy changes, the most significant being the decision to abandon GDP-oriented growth in favour of all-round social spending. China 2012 will be about the ‘real economy' without artificial support systems.

Enormous stimulus packages which diverted most of the money supply into real estate will no longer be an option. The government is expected to channelize monetary supplies into infrastructure, rather than real estate.

s a start, fiscal spending on agriculture and rural development will increase in 2012. Last year, this exceeded RMB 1 trillion for the first time, following Beijing's sharp increase of budgetary spending on projects related to agriculture, rural areas and farmers.

‘Affordable' solution

China's property market has turned out to be the single most important hinge - not just for the country, but also for parts of the global economy. The overheated, oversupplied real estate sector, which cornered much of the post-2008 stimulus funds, is a scary tale of empty ghost buildings, unaffordable to people.

However, if the government's affordable housing scheme, announced last year, works out, there is a chance of achieving a modicum of balance. Work on 10 million public housing units started in 2011 and construction of another 7 million will begin in 2012.

This affordable housing program is an important part of the central government's macro-control policy, which will increase domestic consumption both directly and indirectly. The construction of such houses will help maintain enough demand for steel, cement and other building materials.

Also, the increasing number of low-income residents who buy affordable houses are expected to spend money in decorating their new homes, increasing domestic consumption directly.

All this may seem perfect in theory, but implementation remains a problem as local and provincial governments have a stranglehold on the property sector, making killing profits from land sales. The central government therefore has made implementation of the housing program an important benchmark to assess the performance of local leaders.

Post-2008, world markets lapped up China's stimulus-driven support system. It is now time to take away the crutches.