Nearly half a year after hitting rock bottom, the Chinese economy is headed on a V-shaped trajectory to continued prosperity. But growth will not be enough for economic improvements to take hold, as problems that passed unnoticed before the crisis are threatening to weigh down the hard-won recovery. The aggressive stimulus package triggers dangerous overcapacity risks while the flood of liquidity blows up asset bubbles. Yu Yongding, Director of Research Institute of World Economics and Politics under the Chinese Academy of Social Sciences, shared his views on those issues in an interview with the Shanghai Securities Journal. Edited excerpts follow:

In the wake of a painful export contagion, China was prescribed a heavy dose of stimulus to spend its way out of the slump. The 4-trillion-yuan ($586 billion) program was comparable to 14 percent of the gross domestic product in 2008. For a country with unmatched budget flexibility, the spending spree was reasonable and affordable.

However, one side effect of the remedy is that overcapacity is rearing its ugly head. China's investments in fixed assets have staged a significant run-up since late last year. This gave hope to what would otherwise have been a deeper gloom, but also raised fears over excessive capacity in many sectors. More disturbing, though, is the fact that a rush into big infrastructure projects can easily cause resource wastes, low efficiency and environment damage. In addition, their returns may not be as juicy as expected.

Tackling the overcapacity ailment, while maintaining growth and jobs, remains a top preoccupation and prove to be a truly difficult task. A viable option is to repair the social safety net that offers powerful incentives for consumptions. It will also be necessary to motivate more private investments and propel the small and medium-sized enterprises.

China is seeking to bring exports back to life via tax rebates. Yet, that is far from being a guarantee of a substantial turnaround since U.S. consumers now shy away from spending at all.

Another bottleneck that may choke healthy growth is outpouring liquidity. In an easing monetary environment, the commercial banks directed a flood of low-interest credit into the economy, which helped restart the stalled growth engine. The country has steered clear of inflation so far due to looming overcapacity, but any time soon, the dynamics may change as signaled by the simmering asset bubbles.

Meanwhile, the safety of the vast foreign exchange reserves is also currently at stake. Since China has placed the bulk of its foreign exchange reserves in the low-yielding U.S. Treasury securities, quantitative easing of the U.S. Federal Reserve could inflate the value of those assets. In past months, the Obama administration continued to take up debts, wreaking havoc on its already weak balance sheet. That has added urgency to the question of how to fend off losses of the forex reserves.

All in all, the downturn has provided an opportunity for China to rebalance the economy and adequately address a series of structural problems, such as high reliance on exports, overheating investments and the widening divide between the rich and the poor. Efforts also should be strengthened to set up market-based pricing regimes of power and water, as well as to push ahead with reforms in the education, health care and financial industries.