Stock market crash is really coming? On August 8， affected by the downgrading of the U.S. sovereign credit rating and other nega- tive factors， the Shanghai stock market dropped over a hundred points intraday， falling below 2，500 points just like what it did a year ago， and individual shares collectively reached decline limit.

Asia-Pacific stock markets also suffered Black Monday， with a number of stock markets falling more than 3%， among which the South Korea’s stock market suspended trading due to overwhelming drop. In addition， other markets such as Egypt and Israel also suffered different degrees of collapse.

The mainstream view concerning this issue is that the downgrading of the U.S. debt rating is the fuse of this global stock market crash， and under this background it is rather difficult for China’s stock market that always follows suit when others drop and stays put when others rise to maintain its own integrity.

However， careful analysis reveals that in addition to investors’ panic over the U.S. debt event， China indeed faces some uncertainties over its ability to maintain rapid economic growth， which calls for vigilance.

The first uncertainty is the reliability of the investment model similar to that adopted in the high-speed rail construction which boasts going all out and going fast. As we all know， China’s economic development mainly depends on fixed asset investment and exports while weak domestic demand is its most severe imbalance. In particular， after the financial crisis when the foreign trade engine lost its momentum， China’s 8% growth rate has largely relied on fixed asset investment. The highspeed rail project is among the most large-scale fixed asset investments. The railway investment approved by the State Council reaches 2 trillion yuan while the economic stimulus plan totals 4 trillion yuan， greatly increasing the goal mileages of rail planning.

Now， the Ministry of Railway is facing huge debts and high-speed rail attendance pressure. Once high-speed rail investment is significantly reduced， can China maintain its rapid economic growth without this engine? What’s more significant， the high voltage power grid and smart grid are huge fixed assets investment projects the same with high-speed railway. High-speed rail is good perse， and there is nothing wrong in fixed asset investment projects， but we should be alert to potential failure of this engine.

The second uncertainty comes from China’s economic hematopoietic cells-the small and medium enterprises(SMEs). Although relevant departments have clarified for several times the rumors about collective closure， private enterprises are again in a sorry plight. A large number of SMEs in coastal areas are suffering loss， even at the risk of closedown， and many of them even have been reduced to a situation worse than what they experienced after the 2008 financial crisis.

Sharply rising labor cost and other types of costs including raw materials， utilities， rent， etc.， together with the extremely unfavorable financial environment for private enterprises contribute collectively to the arduous dilemma of small and medium private enterprises which live on processing fees. Data from Zhejiang Bureau of Statistics

show that in the first half year， 4，673 Industrial Enterprises above Designated Size run in the red， with a cumulative loss of 9.15 billion yuan， up 23.5% year on year and that scale of loss and loss rate are 14.6% and 6% respectively.

This has already triggered industrial crisis， in which the available funds leave industries for other fields， such as real estate and civil usury. Large enterprises engage in land speculation， small ones in real estate speculation， and even households are involved in folk loan. According to a survey conducted by People’s Bank of China Central Branch of Wenzhou city， enterprises that can’t find a way to get a loan have no choice but resort to folk loan and currently underground financing in Wenzhou has exceeded 180 billion. Zhou Dewen， president of Wenzhou Promotion Council of SMEs claims that 80% of small businesses in Zhejiang Province depend on folk loan to maintain operation， whose highest interest rate reaches 180% per annum.

Private enterprises are the cornerstones and hematopoietic cells of China’s economy， and now we should keep a vigilant eye upon signs of their dysfunction and slack.

The third uncertainty is the current progress of China’s inflation control， while the bitter fruit of excess monetary supply is just on the horizon. Many institutions predict that China’s CPI in July will still be stubbornly high， maintaining 6% plus， maybe 6.7% at the most. In fact， the pessimistic attitude towards the July data released today by the Bureau of Statistics is another vital factor resulting in yesterday’s stock market collapse. As prices of pork， poultry eggs and many other commodities continue to rise， China’s inflationary pressure is gradually emerging， and the record high inflation rate of the year may be yet to come.

The grave inflation may put Chinese economy at the risk of stagflation， that is， persistent high inflation accompanied by sharp slowdown of economic growth， repeating the plight after the 2008 financial crisis.

The fourth uncertainty results from significant slowdown of the GDP growth in first-tier cities such as Beijing， Shanghai and Guangzhou. The first-tier cities are very likely to lead the way to the middleincome trap. This is a very important signal， which may indicates that China’s GDP slows down its steps.

Media report alleges that due to the limiting policies on purchase of automobiles and housing and the withdrawal of Shougang Group from Beijing， in the first half of 2011， Beijing’s economic growth is only 8%， ranking at the bottom among all the provinces， municipalities and autonomous regions. Shanghai’s growth rate is merely 8.4%. In addition， Zhejiang and Guangdong， the two developed coastal provinces also reduce their growth rate. The four provinces (municipalities) above all rank low in the national GDP growth rate list.

The so-called middle-income trap means that in many nations when the GDP per capita reaches 3000 US dollars or so， the economic growth will fall or step into longterm stagnation. Of course， China has its own national conditions， and the current growth rate reduction is somehow the outcome of selftuning to improve the quality of the economy. However， we must all be on guard against the potential stagnation risks.

(Author: Financial commentator from Beijing Times)