Much of the bank credit granted earlier this year was poured into both the stock and real estate markets while many small and medium-sized enterprises (SMEs) fell short of funds, Zhang said.

Expansion of credit leaves the growth of the real economy far behind, increasing the number of risks the economy must face. The possibility of an asset bubble created by the overgrowth of liquidity presents the most immediate dilemma.

One of the biggest challenges China now faces is that current conditions may facilitate an asset bubble, Ba Shusong, Deputy Director of the Research Institute of Finance of the Development Research Center of the State Council (DRC), said on a China Central Television interview.

Among the 7.37 trillion yuan of newly granted loans, a substantial portion flowed to the capital market, leading to the soaring stock and real estate markets, Ba said. Without other investment channels, the money can only remain in the capital market.

"Seeing from the present situation, there is no tendency for the easy monetary policy to change, and the growth of credit in the next two years will still be fast. This bubble may be bigger than the one in 2007," Ba said.

Wei Jianing, Deputy Director of the Department of Macro-Economic Research of the DRC, said at the Sohu Economist Forum on July 24 that at present, the structure of credit flow is very unreasonable. While an increasing number of loans are being granted, SMEs are crying for credit funds.

"When investigating the matter we found out from some localities and banks that about 50 percent of the credit funds went to the stock, real estate and bill markets, and among the other half that went to the real economy, most was used in the projects invested by local governments. Such a structure of credit flow is a concern to us," Wei said.

A commentary by Xinhua News Agency also warned that China should be vigilant against the expansion of asset bubbles. The Chinese monetary policy should aim at not only economic growth, but also the quality and sustainability of economic increase in the long term, the Xinhua article stated. China's advantage in dealing with the economic crisis is its high deposits and low debts, compared with Western countries. The Chinese Government is capable of expanding expenditures and picking up the economy.

The article also points out that the key point for government investment lies in driving up social investment. If the government does not control the overflow of market funds, the opportunity for steady economic transformation will be lost once the bubble bursts.

Inflationary awareness

The Chinese economy has picked itself up after bottoming out, but since a large amount of money has been poured into the real estate and stock markets, once the real estate and stock bubbles burst, inflation will emerge, said renowned economist Cheng Siwei at an award ceremony on July 19, 2009 in Beijing.

According to Cheng, the country should be cautiously optimistic about the present upswing of the economy. A variety of problems still exist and the ever-present risks of inflation should not be ignored.

Although the current inflation rate is not high, the general public needs to realize that this was only due to the large amount of money flowing into the real estate and stock markets, Cheng said. Once the real estate and stock bubbles burst, it will cause a dramatic change to the inflation rate.

Similar instances had plagued China before. During the early months of 2007, liquidity was excessive, but due to the real estate and stock markets' money absorbtion, the inflation rate remained considerably low. By the end of that year, however, the stock market had collapsed and the real estate market became more sluggish. Inflation eventually became an issue in early 2008.