By staff reporters Huo Kan, Wang Jing, Yu Hairong and intern reporter Wang Lu

(Caijing Magazine) The Shanghai Composite Index has been climbing steadily, reaching 3,000 points July 1 for the first time in a year after rising 34 percent in the second quarter. By the end of July, the index had nearly doubled since a turnaround began in November 2008.

Investors are keeping one eye on the rising index. But with the other, they're carefully watching for hints of any change in government monetary policy – a policy that so far has contributed to the market rebound.

Beijing's policy position early in the year led to a surge in bank loans: New lending totaled 7.37 trillion yuan during the first six months of the year.

A range of other policy issues have led to heated debates in recent months over the future direction of China's economy: Housing prices have soared to levels unaffordable for ordinary Chinese; the central bank is issuing notes; stricter regulations may be imposed on the banking sector; and local governments have been caught up in a frenzy of financing.

Premier Wen Jiabao's comments July 7 and 9 appeased a lot of the guesswork about possible policy changes in Beijing. Speaking to economists and business representatives at a meeting sponsored by the State Council, China's cabinet, he said the Chinese economy is stable, but its foundation is not.

In Wen's words, China "should steadfastly adhere to a proactive fiscal policy and relatively relaxed monetary policy." For now, he said, the government's primary goals would be to ensure economic growth and employment.

One meeting participant, who refused to be named, said policymakers are not worried about asset bubbles. Beijing has solutions for stock market bubbles, the source said. However, policymakers are indeed afraid of inflation, specifically higher food prices.

Based on these signals from policy makers, the red-hot stock market is not expected to cool anytime soon. Nor is the government expected to tighten investment credit policy on a nationwide scale.

Intense Discussions

Nevertheless, debates over policy direction have continued – even intensified.

The finance and commerce committee of the National People's Congress proposed in mid-July macroeconomic policy "adjustments with proper timing and proper range, to find and resolve issues in a timely fashion." The committee also called for "preventing inflation and financial risks that result from an overextended supply of credit."

Supporters of the government's current monetary policy argue that, since the nation's economy has not fully stabilized, any sudden move to tighten policy would not only suppress economic growth but also lead to confusion over perceived inconsistencies, attacking market confidence.

Beijing has chosen to "ensure" economic growth and leave risks as they emerge in the future. The government has been credited with showing firm resolve in launching an economic stimulus package in the fourth quarter 2008 which, amid a global economic downturn, contributed to a second quarter GDP growth rate of 7.9 percent.

However, a real challenge lies ahead: How to manage asset bubbles while maintaining economic growth. And monetary policy is seen as a key to proper management.

Gao Shanwen, chief economist with Essence Securities, says China's monetary policy must be adjusted in a consistent manner no later than the fourth quarter.

Ha Jiming, chief economist for the government's sovereign wealth fund China Investment Corp., said government policy may be due for a change soon, after the consumer price index starts rising again from the negative territory reported in June. A likely time for change is November, he said, although until then a relatively relaxed monetary policy can be expected.

Ha, who attended the State Council meeting where Wen spoke, also expects the furious credit pace to slow in the second half of the year, with new lending to average around 500 billion yuan a month through the rest of 2009. Thus, Ha said, total lending should end the year at a little more than 10 trillion yuan.