China has to decide whether to return to a truly appropriately accommodative monetary policy and pursue sustainable and stable bank credit growth in the coming quarters, after many an economic indicator pointed to stable economic performance.

In contrast to a combination of de-leveraging and liquidity freeze efforts in developed countries, China, backed by its high savings rate, chose to leverage more social investments with stimulus policies. The high credit supply increases since last November have been reasonable and necessary in the context of a severe macroeconomic situation. But as the macro-financial situation has picked up, the Chinese Government should steer clear of the emergency response policy of excessive lending to pursue sustainable bank credit growth.

The total credit supply could exceed 8 trillion yuan ($1.17 trillion) this year if the first-quarter high growth rate is maintained. Excessive lending has helped quench the anticipation of a deflationary scenario and rebuild confidence, but it could bring about negative influence if the emergency response policy continues after all these goals have been attained.

For example, credit risk management systems for banking usually cannot support a lending growth rate of more than 20 percent. Furthermore, an obvious slowdown in credit growth in the future will undoubtedly follow the excessively high growth in 2009, and hence an obvious economic slowdown. Also, if excessive credit growth pushes too fast without leveraging social investment, it will create a bubble in the capital market and hurt economic recovery.

But it will leave enough room to maneuver if China maintains steady lending growth during the rest of this year and evenly distributes a total credit supply of 6 trillion-7 trillion yuan ($878 billion-$1 trillion) throughout 2009. China will possibly begin its economic recovery next quarter. The high increase in bank credit supplies and enterprise deposits in February and March indicate that a rebound in demand will come soon.

Although demand may witness a robust rebound in the coming future, China should be cautious about the economy hitting the bottom for a second time. For example, during the 1997-99 Asian financial crisis, Chinese economy rebounded in 1998 thanks to government-funded investments in infrastructure, but economic growth slowed down in the following year because industrial investments did not catch up. The scenario will recur if government investments fail to leverage social investments or the stimulus plan boosts excess production capacity. An economic downturn could also occur because of an obvious slowdown in the bank credit supply in the future.