Sometimes you can get too much of a good thing. In China’s case, it might be time to step off the policy gas . Beijing has done a great job fighting off the Covid-19 crisis and steering the economy towards what is turning out to be a pretty impressive recovery. Growth is revving back, exports are booming and economic confidence is building good forward momentum. Sustainability is the key but there will come a time when Beijing must consider whether all of the extra monetary and fiscal stimulus pumped into the mainland economy over the last 12 months might be inflaming domestic overheating pressures and boosting inflation risks further down the line. It might be time for Beijing to consider reining back the excess slack and for markets to be prepared for the prospect of higher interest rates ahead. Super easy money can’t last forever and Beijing needs to think about normalising policy as soon as the pandemic eases. Domestic inflation risks seem very benign with China’s consumer price inflation running at only 0.2 per cent in December, after a brief foray into deflation in November when headline inflation turned negative to the tune of 0.5 per cent. There is no room for complacency though, as base effects could easily see the inflation rate picking up fairly sharply in the next few months, reflecting the dramatic drops in consumer prices when the coronavirus crisis first gripped the economy early last year with devastating consequences. As growth began to stall, consumer prices dropped very sharply in March 2020 by 1.2 per cent month-on month, followed by falls of 0.9 per cent in April and 0.8 per cent in May. It’s a statistical quirk but without similar price falls in the next few months, even on modest assumptions, inflation could hit the government’s 3.5 per cent CPI target very quickly this year. Domestic inflation risks are far from down and out and last November’s deflation dip should prove to be nothing more than a short-lived fluke. Before the coronavirus crisis struck, Beijing was already grappling with a high inflation rate of 5.4 per cent in January 2020, and underlying price pressures should resume once the economy starts to normalise. Crazy rich Chinese: how did luxury spending still hit US$54 billion last year? As the recovery pushes progressively higher this year, domestic demand-pull and global cost-push factors could both be building towards much higher rates of growth and inflation than Beijing might have previously anticipated. Given the economic momentum building over the last three quarters, there is a reasonable chance that China could be heading towards double-digit growth by the end of the year. The Organisation for Economic Cooperation and Development is projecting a good rate of recovery for China this year, with growth expected to hit 8 per cent, but the various pieces in the jigsaw seem to be adding up to something much stronger as the economy bounces back. The latest slew of economic data shows industrial production expanding by 7.3 per cent in December year-on-year and export growth going through the roof at 18 per cent. What is impressive is that these growth rates are accelerating and showing no signs of losing momentum. The big issue for Beijing is when the economy becomes too hot to handle and in need of cooling down. It’s far better to be pre-emptive than to leave tightening too late. If there is a need for some quick fine-tuning, it’s probably on the monetary side that some judicious reining in will be required. Domestic credit expansion has been dramatic over the last 12 months as Beijing has plied consumers, business and financial markets with a wall of cheap credit to boost growth. Underlying M2 money supply growth is running around 10 per cent over the rate of inflation, while benchmark lending rates remain at ultra-low levels. At some point when the recovery reaches critical mass of around 7-8 per cent gross domestic product growth, Beijing will need to start tempering the pace of credit expansion and letting short-term interest rates drift higher. The timing will be critical, but the second half of the year could be ideal for switching to a tightening bias. By that time, United States interest rates should be heading higher and Beijing will need to ensure the renminbi remains immune from any exchange rate pressures. The end of cheap money is in sight. David Brown is the chief executive of New View Economics