Policy drives China's economic growth

Therefore, don't expect many more stimulus measures.

China’s economy grew 7.5% year-on-year in 2Q 2014, slightly ahead of expectations. Comparing growth with the previous quarter and the pick-up is more evident, with a 2.0% rise in 2Q compared to 1.5% in 1Q.

According to a research report from the Bank of Singapore, the improvement was partly a result of government measures to support the economy – both through public spending and easier access to credit.

The government still seems to be putting a priority on growth rather than increased efficiency of resource allocation, which is a short-term fix rather than a long-term solution.

However, the bounce in growth means that we should not expect to see many more stimulus measures being announced, with the exception of the real estate sector which is still struggling.

If it is allocated properly then there is no big problem with using government spending to deliver a temporary boost to growth, the report said.

Here's more from the Bank of Singapore:

However, loosening monetary policy is ill-advised when the country is already struggling to control the credit bubble of the past few years. Credit creation has picked up speed again in recent months, as part of efforts to stimulate economic activity.

Credit growth is still running about twice as fast as GDP, which points to two important conclusions. First, economic growth would be much slower if policy-makers try to stabilise the credit-to-GDP ratio.

In particular, investment would be lower without such easy access to cheap liquidity. Leverage cannot increase to infinity – at some point China will need to shift to lower growth and more prudent credit creation.

Second, the government might be successfully delaying the shift to a slower growth path, but it is increasing the overall costs. The declining productivity of investment means that more borrowers will struggle to service debt, ending in a build-up of bad loans.

Looser credit conditions in 2014 will just add to the final costs of dealing with the resultant bad debt problems. We are not overly concerned about the impact on the global financial system if China undergoes a bad debt crisis.

Solid government finances and abundant foreign exchange reserves mean that it is likely to be restricted to be mainly an internal problem.