Despite fears of bubbles in China's property and stock markets, Beijing will maintain its stimulus policies and pump more money into the economy until its manufacturing sector recovers, analysts say.
With weak exports dragging the economy down, Beijing was relying on buoyant apartment and share prices to help it meet its target of eight per cent growth - and does not want to wind back its stimulus measures just yet.
"Public and private statements by Chinese officials signal clearly that they are not worried about asset bubble prices or overheating, and they are instead concerned about the sustainability of the economic recovery now under way," Andy Rothman and Julia Zhu, economists at CLSA, said in a report.
China's economy expanded 7.9 per cent in the second quarter after a 6.1 per cent expansion in the first three months of 2009.
That growth was largely underpinned by a $580 billion stimulus package unveiled in late 2008 and 7.4 trillion yuan in bank lending in the first half of this year.
But soaring property and stock prices this year raised fears that much of the money was being funnelled into asset markets for quick profit - rather than the real economy as intended.
Property sales soared by more than 60 per cent in the first seven months of this year and share prices piled on more than 90 per cent in the same period - triggering fears of emerging asset bubbles.
While policymakers have acknowledged concerns about bubble build-up, they have said there are no immediate plans to change tactics. Premier Wen Jiabao said earlier this month that China's recovery remained fragile and that it was too soon for Beijing to reconsider its current stimulus policy.
And central bank vice governor Su Ning was quoted as saying last week that monetary policy would remain loose until the end of 2010.
New data in August suggested the government-funded spending spree was paying off - fixed asset investment was steady, retail sales accelerated and new lending rebounded after a sharp fall in July.
Yet exports, China's main growth engine, continued to fall in the first eight months of the year.
Michael Kurtz, an analyst at Macquire Equities in Shanghai, said the government was now relying on the property market to drive the economy. Kurtz said policymakers knew their actions could cause asset bubbles to build up and were trying to "stage manage" investment in property and stocks to keep things moving at a "more measured pace".
The government's strategy was to keep potential property buyers and investors "constantly guessing or wondering whether or not policymakers intended to put a more rigid cap on things", he said. The latest example came last Friday when the chairman of the China Banking Regulatory Commission, Liu Mingkang, said bank lending had "surged since the beginning of the year, with a variety of risks" - but offered no concrete solutions. Andy Xie, an independent economist based in Shanghai, warned the government's measures had already created a "gigantic bubble" in the property market.
"Whenever you see prices so much higher than the normal range, it is a bubble," Mr Xie said.
"The average urban property price per square metre is the same as in the US while the US per capita income is seven times China's urban per capita income."