Chinese officials say the country's massive stimulus package last year worked - the economy grew nearly nine percent last year. But it may have worked too well. China has to deal with a host of emerging risks.
China's gross domestic product grew a blistering 10.7 percent in the last three months of 2009 - its fastest quarterly growth in two years.
Growth like that is not unheard of in China but when taking into account the recent global slowdown, it shows an economy on the fast track to recovery.
Much of that growth was thanks to a $600 billion stimulus package last year. Under that package, Chinese banks lent a record $1.4 trillion, most of the new loans going into infrastructure development and real estate.
But economists say such rapid loan growth brings mounting risks.
For one, consumer prices are rising. Inflation rose 1.9 percent in December, up from 0.6 percent in November. And inflation is politically sensitive in a country where hundreds of millions of people still live in extreme poverty.
More worrisome say economists, is that property prices are rising rapidly - like a bubble. Home prices jumped nearly eight percent on average in December from the same month in 2008 - the fastest climb in 17 months. Sales soared almost 76 percent to a staggering $644 billion last year - roughly the size of the combined annual gross domestic product of Singapore, Thailand and Malaysia.
Nouriel Roubini, an economics professor at New York University who is known for having predicted the recent financial crisis, says the success of China's stimulus may backfire.
"There are already signs of overheating of some parts of the economy," said Roubini. "That's why China surprised the market and started tightening its monetary and credit policy to avoid inflation from getting out of hand."
The central bank this month tightened credit by raising the minimum amount of reserves that banks must keep and asking banks to limit new loans to about $1 trillion this year. It also raised the interest rate on its three-month bills.
Banking authorities worry that new loans have gone mostly to big clients in the construction and energy sectors. That means banks could be saddled by huge bad debts if any of those clients fails.
Still, banks lent $88 billion in the first week of January.
Speaking at a conference in Hong Kong last week, Roubini said China's credit boom means too many factories, office buildings and houses are being built.
"Most of the growth rate in China in the last year has been driven by fixed investments, on one side infrastructure spending and essentially state-owned banks being told to provide credit to state-owned enterprises and telling state-owned enterprises to produce more, hire more and increase capacity at a time when there's already a massive glut of manufacturing capacity," he said. "So my fear is that the strategy of China can work for a year or two but it's going to lead to even more glut of capacity and that's going to lead eventually to situations of non-performing loans."
He says it will take a radical policy change to fix the situation - such as shifting China's growth model so it is driven less by exports and more by domestic consumption. Roubini says that is unlikely to happen fast enough.
Lee Jong-wah, chief economist of the Asian Development Bank, says China needs to find the right balance as it tries to encourage growth.
"Even though growth rate is maintained at the right level, and demand especially from consumers and investors increases over time, still [a] significant increase in domestic liquidity always poses a risk of an increase in price," he said. "This money is always chasing the highest return asset. It may go to real estate in major cities, it may go to some stocks, and will create problems - financial excesses and then the burst[ing] of the bubbles."
There are other concerns about China's growth. Economists are looking at exports: while shipments rose in December for the first time in 14 months, demand from major importers in the United States and Europe remains weak.
And then there is the issue of the China's currency, the yuan, which has been effectively pegged to the dollar since the middle of 2008, when demand for exports began to decline.
China's trade surplus dropped last year for the first time in six years. But the jump in exports in December could provide ammunition for the Group of Seven industrialized democracies to pressure China to let it appreciate. If the yuan rises, it would make Chinese exports more expensive.
While Chinese officials want to head off problems from excessive growth, they also want to avoid abrupt action that could slow the economy sharply.
Premier Wen Jiabao said in January that withdrawing the stimulus measures too soon could reverse growth, but he acknowledged that the government is watching for signs of inflation and asset bubbles and is trying to rein in the credit boom.
Liu Mingkang, chairman of the China Banking Regulatory Commission, echoed that thinking last week in Hong Kong.
"Looking ahead, our list of challenges is not short. In addition to credit risk, market risk and operational risk are real, too, and the mission to cultivate and guide the banks to support small businesses in China," said Liu.
Liu says that all these issues would mean it would be harder for the government to help the economy cool just enough to be healthy, and not enough to cause problems. He says that while last year was tough for China's economy, 2010 could be more complicated because of the uncertainties the country faces.