CHINA SHORT VIEW

It is a commonplace that the bad news on the world's financial system is already reflected in market prices. That in turn implies that markets should be ready to recover.

But the world is about to get a lot of news about the Chinese economy. China was once central to hopes that the world could muddle through the credit crisis without a recession. Forecasts remain optimistic. So there is a risk of bad news that the market has not priced in.

As 2009 started there was a broad consensus that the worst that could happen to Chinese economic growth would be a annual growth rate of 6 per cent. This would equal its lowest growth rate, according to official figures, of the past two decades. Much less than this would make it harder for the authorities to keep meeting the aspirations of the population.

However, various measures of economic activity suggest that an outright contraction in the Chinese economy is now at least thinkable. To take one widely discussed example, electricity production in November was down 7.8 per cent from a year earlier. This was the sharpest decline on record. Typically, electricity production has grown at more than 10 per cent.

Chinese imports in December were down 21.3 per cent from a year earlier. Falling commodity prices explain some of this. China may also be cutting its reliance on importing parts from other countries in favour of building and assembling everything itself. This might explain the torrid decline in exports for Korea and Taiwan. But it still looks as though China is suffering a significant fall in domestic demand.

Today sees a pile of Chinese data, including inflation, sales, industrial production and growth, which is expected to come in at 6.8 per cent.

With a Chinese economic contraction now thinkable, that data could stoke the fears that already stalk the financial system.