The recent bounce in the economy - which perhaps may be more accurately described as a slowdown in the rate of contraction - has been attributed primarily to this surge in lending and led Premier Wen Jiabao to announce that China's economy had put in a surprisingly good first quarter. Can it continue?

On the one hand several commentators and policymakers suggest that regulators are worried the surge in lending might lead to an explosion in bad loans in the next few years. This will almost certainly be the case, and it has prompted some to predict that loan growth will slow sharply in the coming quarters, resulting in a sharper economic contraction on the mainland later this year.

Others, such as People's Bank of China deputy governor Yi Gang, argue that there are more benefits than risks from expanding credit quickly during a crisis, and insist that Chinese policymakers will do whatever is necessary to keep the economy from slowing sharply. In that case, we should only expect a slowdown in loan growth after the economy begins growing again at a rate in line with government targets. This may take at least a year or longer.

While most commentators agree that continued rapid loan growth will take the sting out of the global economic contraction for China in the short term, debate is raging about the medium- and long-term effects of the loan growth. Supporters argue that with the severity of the crisis around the world, it makes no sense for authorities to worry about the long-term consequences of current activities. In their view, the global crisis has as much to do with collapsing confidence as with real economic distortions and imbalances, and policies aimed at recovering confidence will significantly reduce the cost of the crisis.

This may be wishful thinking. As Japan demonstrated after its 1990 crisis and Mexico after its 1982 crisis, confidence is actually a relatively small factor. It is real fundamental imbalances that need to be fixed - in the current case the fact that China and the United States made the same mistaken bet on unlimited US consumption.

In Japan after 1990 and Mexico after 1982, strong measures aimed at slowing down the correction of economic distortions and imbalances may have forced the financial and economic system into prolonging the recovery of productivity growth for many years, so that the ultimate cost of the crisis to total wealth generation may have been significantly higher by postponing the adjustment. Both countries experienced 'lost decades' of economic growth.

If China's banks see an explosion in non-performing loans in the next few years as a consequence of this year's out-of-control lending surge, either the central government will have to borrow or tax to recapitalise the banks, or the regulators will keep deposit rates very low as a way of subsidising banks' profitability so that they can earn their way out of the crisis. Either solution represents a transfer of income from households to banks and will represent a continued drag on consumption growth.

Since it is unlikely the US will be in a position in the near future to return to the days of large trade deficits, and since no other economy can replace the US in the role, turgid consumption growth in China will translate into turgid gross domestic product growth for many years. Rising non-performing loans are not a small threat to China's long-term growth.

Michael Pettis is a professor of finance at the Guanghua School of Peking University and a senior associate at the Carnegie Endowment