- John Foley is a Reuters Breakingviews columnist -

For China, 2009 was a momentous year. The People’s Republic turned 60, and Beijing staved off economic disaster with an unprecedented 4 trillion yuan ($585 billion) stimulus package. The stage is set for an eventful 2010. If all goes well, China’s GDP is set to become the world’s second largest. But all may not go well.

There are three big concerns for the upcoming Year of the Tiger: inflation, protectionism, and inequality.

One type of inflation has already arrived. Thanks to some $1.5 trillion of government-mandated bank lending in 2009, twinned with speculative capital flowing from abroad, the prices of financial assets such stocks and property have exploded. Beijing clocked up a record land-sale price in 2009 and Hong Kong a record apartment price. The first batch of stocks on Shenzhen’s new growth-stock market doubled on their first day of trading. The second batch, just over a month later, tripled.

While asset prices soar and the cost of basic commodities such as oil and iron ore remain high by historic standards, retail prices are barely increasing. Many central banks and governments face this confusing situation, and none of them have an obvious solution. A rise in policy interest rates could take cash out of consumers’ and producers’ pockets, slowing growth to a crawl. In Beijing, that sounds like political suicide.

In the semi-controlled Chinese economy, the authorities in the centre have turned to restrictions on lending to try to reduce the monetary pressure. But that may not succeed. The strong links between banks and local governments mean new loans don’t always go to the most productive channels. Next year’s lending target is 25 percent less than 2009′s. But perhaps two-thirds of the disbursed funds will go to sustain half-finished infrastructure projects, leaving little for new business investment.

If tighter policy slows growth too sharply, the government could decide that inflation of any sort is the lesser evil. But monetary instability carries its own political and economic risks.

Protectionism could be another problem. Trade skirmishes surfaced in 2009 — the United States slapped tariffs on Chinese tyres, and China did the same on U.S. and Russian steel. Those are special cases, but the low yuan exchange rate can be considered an unfair export subsidy which lures American consumers into overspending.

Some economists are already arguing that Chinese currency inaction justifies tariffs for the sake of balancing trade. Disgruntled U.S. politicians could join in, especially if the U.S. unemployment rate, already at 10 percent, keeps on rising. They could claim that Chinese production threatens to accelerate global warming. True or not, trade restrictions could severely disrupt China’s still export-dependent economy.

The third risk — inequality — is the least visible but the most dangerous. It’s a genuine issue. The mix of fast-rising asset prices with wages that are hardly budging must be widening the gap between owners and the property-poor proletariat. The reported unemployment rate of 4 percent ignores an estimated 150 million migrant workers, while fewer than 70 percent of graduates have jobs.

Policymakers’ biggest worry is that an idle and unequal populace will create unrest. A recent survey by the Zhejiang Academy of Social Sciences cited in the South China Morning Post found that 96 percent of respondents “resent the rich”. It is no accident that Xinjiang province, which saw riots in 2009, has one of China’s biggest wealth gaps.

The available measures suggest China it becoming more unequal at an alarming rate. In 1983, China’s Gini coefficient, a measure of inequality, was 0.28, roughly the same as Sweden, Japan and Germany. By 2007, the Asian Development Bank estimated a Gini coefficient of 0.47 — closer to Argentina and Mexico. That pace of acceleration is virtually unheard of.

China could probably address each of these three problems, one at a time. Inflation can be micromanaged through a controlled bank system. Protectionism can be quelled with diplomacy, unrest with force. The last 30 years — in which China’s sustained growth has exceeded anything recorded by humanity — is a triumph of mind over matter. But if all three challenges arrive at once, the Year of the Tiger could prove fierce indeed.