China's stimulus has worked a little too well. After the economy all but ground to a halt in the final quarter of 2008, output increased by 10.7 per cent in 2009. Policymakers have demonstrated they can hit more or less any output target they choose. But no economy, not even a planned one, can eliminate side-effects. One cause for concern, or at least vigilance, is inflation. The consumer price index rose 1.9 per cent in December against the level of a year before. More broadly, an ebullient stock market and buoyant property prices suggest stimulus money is leaking into speculative investments.
Last week the Chinese authorities instructed banks to halt lending temporarily after a credit binge at the start of the year. More such guidance will follow. But the central bank will also have to think about when to raise interest rates. One option is to allow a little bit of inflation, which would have the same effect as a revaluation with less potential for political backlash. Yet even that will probably not be enough to allay growing anxiety abroad as China's export machine kicks back into action. An appreciation of the renminbi is probably the only way Beijing can avoid serious trade tensions and tilt the economy back towards domestic growth.
Even a revaluation will not be a panacea. China's growth last year was engineered by substituting net exports with state-led investment. But rather than addressing China's unbalanced growth, the stimulus package – by ratcheting up spending on ports, roads, airports and industrial capacity – may actually make things worse.