With the export sector completely imploding in the past year (down 25%), economic expansion in China has been driven almost entirely by investment. And while GDP growth this year will likely reach the magical 8% that the government is looking for, a lot of economists are worried about long term problems due to excess money supply, non-performing loans and excess capacity. A good summary of the issue can be found on the China Financial Times blog here.
I believe that the problem of short-term over-capacity China is facing is being over-estimated.
With double digit growth in demand of nearly every commodity as well as energy over the past years and presumably well into the future, even a 100% excess capacity will be absorbed in a few short years.
Also, I believe the Chinese government is not at all worried about non-performing loans. Only a few years ago the government spend 200 billion dollars to clean up the bank’s balance sheets. And they have no compunction about doing it again. That problem is 3-5 years in the future. Nothing to worry about right now.
Excess money supply might turn into a bigger problem if by the end of next year China is seeing double digit inflation. But if the government manages to turn down the money faucet delicately enough so as to not choke off capital investment and also mop up excess liquidity, then excess inflation can also be avoided.
Given the global climate, the government had to act quickly and decisively and it was probably the lesser of two evils (the other being pumping too little money into the economy)