Is China's slowing economy in crisis or transition?

An investor at a brokerage house in Huaibei, Anhui Province, September 2011 Photo: REUTERS/Stringer

The signs are getting worse. Today, the latest inflation figures for China show a drop of around two percent - the lowest for almost three years. That means prices are falling because no-one is buying much.

This Friday, ominously the 13th, GDP figures for the second quarter of this year are expected to confirm that the Chinese economy is on a slide.

So what sort of landing will the Chinese economy have? That is the question splitting opinions.

Workers operate on a rubber glove assembly line at a factory in Zibo, Shandong Province Credit: REUTERS/Aly Song

The 'hard landing' camp says the money cushion, which has supported and been created by more than a decade of thumping growth, is no longer stuffed full of cash. Indeed, figures this week are likely to show that more money is leaving China than coming in to be invested.

The 'soft landing' team prefer to say that the government has lots of levers to pull and can avoid a crash. That is true to a large extent, and it is worth noting that China's banks are already nationalised, under the ultimate control of the Party.

There have always been predictions of doom. China's crash is always just around the corner, and yet it never happens. Will it now? Bear in mind that 2012 overall GDP predictions are still around the seven percent mark - that's low compared to previous years. But just think of the inane grin on the Chancellor's face if he was able to present figures like that to the British people.

A Rolls Royce being polished at the a factory in West Sussex - 3,538 of the cars were sold to China in 2011 Credit: Chris Ison/PA Wire

Walk around a 'Luxury Fair' as I did recently and the exhibition centre was crowded with China's middle classes looking at eleborate £20,000 vases, log cabins and monster-sized quad bikes. Also on sale, handmade British sports cars at around £200,000 for the latest model. It made me think: crash, what crash?

The government does want the economy to slow - that plan is in Beijing's current five-year plan. The deep pockets of the high-spending middle classes are meant to provide a fresh source of growth in an economy and to oil the transition from cheap 'Made in China' exports to importing luxury goods 'Made for China'.

The problem comes when the gear change is clumsily executed. Crashing the gearbox can lead to a loss of momentum. No wonder the government had ordered two interest rate cuts in the last month, but it feels too early to say those cuts were panic measures.