FACTBOX-Key political risks to watch in China

BEIJING, June 1 (Reuters) - China weathered the global economic downturn with robust growth, but this has generated new risks and concerns over trade imbalances, currency policy and the overheating of the domestic economy.

Following is a summary of the key risks for China:

* TRADE AND CURRENCY DISPUTES

Relations between Washington and Beijing have thawed after a tense start to the year, but with both countries still worried about growth as the euro zone crisis threatens the world economy, there is room for disputes over trade protectionism or China's currency controls to flare up again.

Financial markets and analysts forecast China will soon free the yuan from an unofficial dollar peg, nearly two years after it was fixed at a rate many economists regard as undervalued, and which Western politicians says benefits Chinese exporters.

The key questions of when and by how much the yuan is allowed to rise remain unknown however, and if Beijing moves too slowly for Western politicians the issue could become a flashpoint.

Members of the U.S. Congress have demanded tougher steps to press Beijing, including the threat of extra tariffs on Chinese goods. Rising disquiet about Chinese trade policy in the United States could be exacerbated by broader tensions over Tibet and Taiwan and by U.S. Congressional elections in November.

But if the West pushes too hard, China's leaders may decide it is politically impossible to act -- for risk of being seen to set policy according to Washington's agenda.

What to watch:

-- Hints of a change in China's currency policy. Most analysts expect China to keep the currency on a tight rein until at least mid-2010 to cement its economic recovery.

-- The rhetoric from Washington and Beijing. Both sides want to avoid any serious economic dispute but also protect domestic industry and maintain popular support at home. Signs Congress is gaining more influence over U.S. policy, or that retaliatory trade measures could expand, would unsettle markets.

-- The debate in China. A top-down political system limits outright clashes between officials and ministries with rival views on the currency, but tracking public comments can provide useful hints on the direction of yuan policy.

* HOUSING BUBBLE AND LOCAL GOVERNMENT DEBT WORRIES

Chinese property prices are looking bubbly and the government is stepping up its efforts to take the market off the boil.

A small number of investors, such as hedge fund manager Jim Chanos, made waves in recent months with dire predictions of a collapse of Chinese housing prices.

Most analysts, however, say that risks are largely confined to high-end segments of the property market in some cities and that the broader market will be on sound footing, so long as the government is able to stabilise prices.

Intertwined with worries about a property bubble are concerns about local government debt. With weak revenues streams, provinces and cities borrowed heavily to fund a surge in investment last year. To a large extent, they rely on cash from land sales to pay back debts.

If property prices head south, falling land prices could expose a mountain of bad debts on local governments' books. Some analysts reckon that they owe as much $10 trillion, a growing risk to Chinese public finances.

Several broad political issues should be on investors' radar screens. Housing is increasingly unaffordable for most ordinary Chinese, a potential source of social discontent that could prompt stronger policy responses.

Sharp falls in housing prices would cause pain for banks and for the many Chinese who have bought homes with their savings. Stock market tumbles have not cause serious social ructions, but Chinese have much more to lose from a housing crash.

If local governments cannot repay debts, this risks squeezing cash flow for spending on areas like education and healthcare, and leaving banks with portfolios of non-performing loans.

What to watch:

-- Monthly housing price data from the government is flawed but offers the best indication of market trends.

-- The government's efforts to gradually take the fizz out of the market have focused on cracking down on speculators through loan controls, while expanding the supply of affordable housing to tackle popular discontent. There is ample scope for policy missteps, especially a repeat of over-tightening seen in 2007, a major factor in the economy's subsequent slowdown.

-- Beijing has moved recently to rein in loans to local governments. Look out for new assessments of debt, or restrictions on land rights, often used as collateral.

* TENSIONS IN NORTHEAST ASIA

Northeast Asian ties have been put to the test by the sinking in March of a South Korean warship, with the loss of 46 lives. Seoul, Tokyo and Washington blame Pyongyang.

China, secretive North Korea's only major ally, has refused to join the chorus of condemnation and says only that it is still assessing Seoul's investigation into the sinking.

Beijing is wary of abandoning its unstable neighbour, fearing loss of influence. Ultimately it wants to avoid a collapse of the government of Kim Jong-il, which could send hundreds of thousands of refugees flooding across its border and remove a buffer against the U.S. troops stationed in South Korea.

China's relations with its near neighbours are at risk, and the U.S. has stressed the importance of a strong response to the "act of aggression". Meanwhile, China and the U.S. have narrowed their differences over how to contain Iran's nuclear ambitions.

What to watch:

-- China's eventual response to South Korea's report, and its support for any measures to sanction Pyongyang through the U.N. Security council. If China remains obdurate, trade ties could suffer as well as progress on other East Asian issues that require Seoul and Tokyo to work with Beijing.

* INTERNET CONTROLS, AFTER THE GOOGLE DISPUTE

Concerns about censorship and hacking were highlighted by Google Inc's (GOOG.O) closure of its mainland Chinese-language google.cn portal, after it said it was hit by a cyber-attack.

China says it condemns hacking and does not want the dispute to hurt broader commercial ties, adding that companies remain welcome as long as they accept the country's laws and policies.

But with Washington pressing Beijing on Internet controls, Western firms, especially in sensitive sectors such as the Internet, media and telecommunications, face uncertainty and potential regulatory fallout.

What to watch:

-- Beijing could strengthen enforcement of rules intended to ensure international Internet companies obey censorship controls and other restrictions. It could also block access to other Google services from China, including the main google.com site, or use unannounced steps to frustrate access to such services.

-- Chinese media's harsh criticism of U.S. Internet policy could embolden some officials to protect domestic companies or sectors against foreign competition. Watch out for reports of foreign business deals in China that are slowed or shelved.

* SOCIAL STABILITY

China's Communist Party has so far maintained general authority and control despite fears in 2008 and 2009 that the global economic crisis could spark unrest among laid-off workers. Outbreaks of discontent have remained brief and localised.

But with the Party and global markets treating social stability as a crucial issue, even limited challenges to the Party's control can produce outsize policy reactions.

Ethnic tensions in Tibet and Xinjiang have distracted the central government and drawn international concern, but have not seriously threatened national stability.

What to watch:

-- Emergence of any regional- or national-level protest movements. So far, protests in China tended to be directed at local officials. Strict controls make it difficult for any organised movements to form beyond the local level.

-- Signs urban public concerns about inflation and housing costs are congealing into broader discontent. That is unlikely to turn into mass protest, but could spur faster moves to cool economic overheating. [ID:nSGE60O00K] (Reporting by Emma Graham-Harrison, Lucy Hornby, Simon Rabinovitch, and Chris Buckley; Editing by Andrew Marshall)