By issuing massive banking credit, the government is providing a stable floor under what would otherwise have been a more severe downturn. The problem for the country now is it cannot keep the economy afloat on an endless supply of money. So what should be the next step on the path to recovery? Ba Shusong, a senior economist at the Development Research Center under the State Council, offered suggestions for solving the dilemma in an article recently published in the Beijing News. Edited excerpts follow:

The new loans issued so far this year have been comparable to 26 percent of the gross domestic product last year. The stimulus measures seem to be taking root as a number of economic indicators turn around in the first half of this year. What China needs to recapture now is a shift from the government bailout to market-driven investments. The regulators should create a more lax policy environment for private companies to join the economic revitalization campaign. This would help the economy rebuild its health and set sail for more vibrant growth.

Slowly, but surely, the Chinese economy is bound for a significant rebound. Yet, the sudden surge in credit has sparked caution over some underlying risks facing the country. In response, the monetary policies may need some fine-adjustment to hold the risks at bay.

The over-abundance of liquidity is mounting upward pressure on a variety of consumer products though the CPI (consumer price index) remains at a low level. But as is often the case, there is a time lag before the inflationary effect to work throughout the economy. Moreover, the outpouring loans may have mostly flowed into non-trade sectors like roads, bridges, equipment, electricity, real estate and stock markets, blowing up asset bubbles that wait to burst. So it is imperative for the policy makers to keep a vigilant eye on the credit explosion.

If the outpouring of lending continues its staggering pace in the latter half of this year, there will be little room left for credit controls in the next two years as many of the long-term government projects need follow-up capital to complete construction.

In reaction to the deep gloom, many governments have taken on a huge number of debts, mostly bank loans, which helped bring the economy back to life. However, the heavy debt load and weak solvency of the local governments have now become a bottleneck choking off the growth momentum. As local governments largely rely on land sales to repay their debts, they may have to push up the land prices, adding fuel to the already dangerous property fires.

To strengthen their support to infrastructure projects, the local governments can issue bonds, which have proven to be an effective source of financing. It is suggested that the local governments take a more diversified and efficient financing strategy to press ahead with economic revival, including municipal bonds and other securitized financing vehicles.