By James Dorn China's massive stimulus program is being fuelled by an unprecedented increase in bank lending. More credit has been extended in the first quarter of 2009 than for all of 2007, and bank lending is growing by nearly 30 percent on an annual basis compared to about 15 percent in October 2008. That lending spree reflects an ultra-easy monetary policy with both the monetary base (currency plus bank reserves) and broad money (M2) growing at more than 25 percent a year.

The excessive growth of money and credit relative to real gross domestic product growth of slightly more than 6 percent poses a significant inflationary risk if the People's Bank of China (PBOC) does not put on the brakes later this year. Once the inflationary genie is out of the bottle, it will be...