WeiGucrop.jpg– Wei Gu is a Reuters columnist. The opinions expressed are her own —

China watchers are worried that excessive lending leads to massive overcapacity. However, the risk of Beijing pressing too hard on the brake is even greater. At least for now, China should be able to growing its way out of its bad debt problems.

Banking regulator Liu Mingkang recently told a conference that China’s banks should lend out 6-7 trillion yuan next year, equivalent to about one fifth of China’s annual output. Some think that is too much. However, these fears are overdone. Indeed, if new lending falls below 10 trillion yuan, bad debts will soar, private investment will be crowded out and the economic recovery may be derailed.

Since the stock of loans has been enlarged by this year’s explosive credit growth, the regulator’s target represents  a 15 percent increase in China’s loan base. This is in line with past trends, but marks a sharp slowdown from this year’s 30 percent growth in total loans.

Just to keep funding current ongoing projects, the economy would need 8.3 trillion yuan in new loans in 2010, according to Nomura estimates. So the current goal implies that here would be no money left for new projects, and some current projects will not receive funding.