As the United States economy starts to grow, it's time to talk about exit strategies - the difficult task of easing back on state-sponsored stimulus programmes before any asset bubble starts to burst.
When it comes to exit strategies, all eyes are on China. Can the country that has replaced the United States as the world's major liquidity provider in this crisis manage a graceful exit?
For those looking for an answer, a meeting held in Shanghai on Tuesday may be able to shed some light.
The speaker: Liu Mingkang, the regulator of the country's banking sector.
The attendees: Leaders of the mainland's 144 city banks and small financial institutions.
The topic: Sanbuyao (Three don'ts).
'Don't focus on [expansion] speed. Don't focus on [business] size. Don't focus on ranking [in the industry],' said Liu, appealing for a conservative lending policy.
Given Liu's normal soft-spoken style, this was not what I would call a cordial tone. And he has every reason to be upset.
On October 5, Liu told his peers on the sidelines of the annual International Monetary Fund meeting that the country was doing well with the fine-tuning of its expansionary monetary policy.
He said mainland banks had only given out between 300 billion yuan (HK$340.53 billion) and 400 billion yuan in loans in September. This number was way below the market expectation of 600 billion yuan and the August record of 4.16 trillion yuan.
Yet, only 10 days later, he was proved to be wrong, with official figures showing 516.7 billion yuan in new loans had been made last month.
In a country where maximum effort is spent collecting data so that officials can talk about figures for hours, the shock and embarrassment can only be imagined.
City banks and other small-sized financial institutions are to blame. While the Big Four state-owned banks followed Beijing's order to tighten lending, their petty rivals have done the opposite.
They gave out 390.8 billion yuan in loans, pushing their share of the tally from 25 per cent in August to more than 75 per cent, while the Big Four cut their share from 70 per cent to 24 per cent.
No wonder the small banks were all summoned less than two weeks later to be lectured.
This embarrassing episode points to the real challenge for China in exiting its current, or any, expansionary policy without landing on its back.
It is not about banks' poor risk awareness. It is about the conflicting interest between central officials and those sitting in the provinces, cities and counties when it comes to credit tightening.
To understand the dynamic, one has to know why the small local banks are lending aggressively.
Some explain it as a business drive - the urge to expand market share when the Goliaths tighten their purse strings, or taking advantage of Beijing's relaxation of restrictions to channel credit to the much-discriminated private firms and farmers.
A more convincing reason lies with the local authorities, which either own or control the home-registered banks.
These officials have little incentive to slow the treadmill. We saw it in 2004, 2006 and during many other attempts by Beijing to cool down the economy.
In fact, the incentive to drive at full speed may be bigger than ever this time, given the leadership reshuffle at all levels that is scheduled to happen in 2012 when the Chinese Communist Party holds its 18th National People's Congress. The last major reshuffle happened in 2003.
In China's political calendar, three years is not too distant. Officials at both the senior and local levels are already manoeuvring for higher jobs.
When it comes to promotion, gross domestic product growth figures remain a key criteria, despite the rhetoric about green or quality GDP. After all, bureaucrats are rated not just by those in Beijing but also by stakeholders back home. What better and quicker way to drive an economy than by pumping money into the property market?
And let us not forget the 30,000 investment arms set up by local authorities to finance a key part of the current stimulus, such as railways, roads and many other infrastructure projects.
With little exception, these investment vehicles have been borrowing from banks and the public with balance sheets that contain nothing but land. It is not hard to imagine what would happen should property prices go south.
No official will want that to happen during their term, not during this critical moment of political elbowing. It is therefore not surprising that local banks have been lending aggressively despite Beijing's orders.
What really surprises is that Beijing is surprised.
Without doubt, we are going to see more rhetoric about risk management or some administrative orders about lending aimed at the local financial institutions. But experience has told us these 'moderate' measures aren't going to stem the spending spree at the local level.
However, Beijing is unlikely to do anything drastic. Given the weakness in the labour and export markets as well as the battle for the 2012 Holy Grail, growth and stability remain the theme.
So, be prepared for a very slow exit. That means a continued supply of abundant liquidity on the mainland and in Hong Kong.
As for the risks of any asset bubbles that may accumulate along the way, moderate, if not futile, measures will be announced by Beijing to check them, causing some hiccups in the market. Call it an exit with socialist characteristics.Topics: Monetary Policy