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Economists, Business Leaders Ponder When to End Stimulus Efforts in Asia

The world's major economies have spent trillions of dollars in government money to ease a severe global slump. That spending has led to huge budget deficits in some countries, including the United States, but it also is credited with recent signs of economic recovery. In Asia, business people are now asking if governments should stop the spending now.

Recently Chinese Premier Wen Jiabao said his government's $600 billion stimulus effort has worked. But he told a gathering of financial industry experts that because of remaining uncertainties in the global economy, China is not about to start turning off the money tap. He spoke through a translator.

"We cannot and will not change our policy direction in the absence of proper conditions," he said. "We will continue steady and relatively fast economic growth as our primarily task. We will unswervingly follow the proactive fiscal policy and the moderately easy monetary policy, and implement and continuously enrich and improve the stimulus package."

Late last year, governments around the world took bold steps to save their economies from the threat of a deep recession. To stimulate growth, they pumped billions of dollars into their economies and lowered interest rates so that companies and consumers could get cheap credit. In China, banks lent as much as the annual gross domestic product of Canada.

But as economies start to recover, governments and business people are debating when to stop the stimulus. Getting the timing wrong brings huge consequences.

Cutting off the money too soon means fragile growth could falter, especially since demand for Asian exports remain weak.

Zhu Min, group executive vice president of the state-owned Bank of China, says although major economies in Asia such as China, Japan and South Korea, grew in the second quarter, the recovery is still fragile.

"I would say it's still too early to talk about exits today because the world still needs a fiscal and monetary policy to stabilize," said Zhu.

But acting too slowly has huge risks, too. As Zhu notes, one of the biggest is inflation, caused by vast amounts of money being used recklessly and over-stimulating demand. One fear is that prices for investments such as stocks and property could rise rapidly, creating a so-called asset bubble.

"But given nine trillion dollars liquidity in the market, given four trillion dollars in U.S. debt, people are obviously concerned about inflationary pressure, people are obviously concerned about the U.S. deficit, people are obviously concerned about U.S. dollar devaluation," said Zhu.

Stephen Roach, Asia chairman of the U.S. investment bank Morgan Stanley, recently said identifying a timetable for an exit is a "Herculean task". But he says lessons should be learned from the U.S. recession of the 1990s, when, he says, the Federal Reserve Bank left interest rates too low, for too long.

"And sowed the seeds for future bubbles and then embraced a very incremental exit strategy in trying to normalize the funds rates and actually continued to fuel the credit and property bubbles of recent years," he said.

Some economists already worry about an asset bubble in China. Beijing's stimulus money has mostly gone to building infrastructure to help cushion the pain of millions of factory jobs lost because of the global slowdown. But a substantial amount found its way into the surging property and stock markets.

Continuing stimulus efforts too long has other risks.

After Japan's asset bubble burst in the 1990s, the government spent years trying to stimulate growth. And after new stimulus spending over the past year, Japan faces an enormous public debt, twice its annual gross domestic product, which drags down growth. The Bank of Japan maintains near zero interest rates despite severe deflation or fall in prices.

Heizo Takenaka is an economist and Japan's former minister of economic and financial policy. He says government spending is good in the short run, but stimulus money must be targeted for it to work.

"In the case of Asian countries, infrastructure investment is good in the short run and also in the long run. However, just to rescue the damaged companies - this kind of policy is also taken by some countries. This kind of policy to help will require another policy to solve," he said. "So the solution will not come. This [is what] we experienced in the 1990s. So how to get rid of this policy to help to shift in the policy to solve is the most important part. Otherwise we will see a very long lost decade just like what Japan experienced in the 1990s."

Takenaka says it is difficult to find an exit and it may take several years. He says governments must have the political will to decide to end the spending.

Antony Leung, chairman for greater China for the U.S. private equity company Blackstone and formerly Hong Kong's financial secretary, agrees.

"It is politically more difficult to withdraw this liquidity from the market. That's why it would be nice to have an exit strategy with clear timetables and indicators," he said. "But my fear is because of the political pressure it may not happen."

Many governments are looking for signs that the U.S. Federal Reserve will begin to tighten up its monetary policy, slowly pulling money out of the system.

Exit strategies are expected to be on the agenda when leaders from the major developed and developing economies of G-20 meet in the U.S. city of Pittsburgh next week.