The panic flight of investors from mainland and Hong Kong stock markets on Wednesday is for good reason. The possibility that Beijing might turn off the massive liquidity spigot that has fueled the equity market is coming none too soon.

China's credit explosion has not just delivered another stock market bubble but a commodity one as well. The stock blowout was well illustrated by the launch of Sichuan Expressway A shares, which immediately rose 200 percent over the issue price and now are at a huge premium over their Hong Kong-quoted equivalent. China's stocks have so far gained almost 90 percent this year.

There is not much room to doubt that China's lending bonanza is going at least as much into asset price appreciation as into the real economy. The rise in stock prices is paralleled by a similar bounce in real estate. Both have also flowed through to Hong Kong, though to a lesser extent, with even property prices up more than 20 percent despite high unemployment and modest end-user demand.

But less noticed than stock prices has been the surge in Chinese commodity imports. As the investment bank UBS notes: "In the second quarter of 2009, Chinese iron ore imports rose 41 percent year on year in volume terms. Copper imports rose 140 percent". Coal imports were up 300 percent, and aluminum by nearly 400 percent. Diverse other commodities including soybeans and pulp have also boomed.

Naturally this import surge has been a major driver in the rebound of commodity prices generally, and base metals in particular. It has also caused bulk freight rates to recover a long way from the depths of six months ago.

But how much of this is sustainable? For sure, final demand in China has been picking up, led by government directed capital investment. There is clearly some rebound in stocks of raw materials which were allowed to run down as a result of financial sector disruption and overall economic uncertainty in late 2008. Some import figures are not necessarily good indicators – coal for example as China is largely self-sufficient. Some of the buying may be being encouraged by the government to reduce the size of China's trade surplus.

But the numbers seem to be telling a much bigger story than either final demand pick-up or rebuilding of inventories to normal levels. They tell of the irresistible combination of very cheap and easily obtained money and a belief that commodity prices are cheap. Well, maybe they were three months ago. But how much of that recovery has been a self-reinforcing belief in the value of real assets?

That is not stupid. Offered cheap money and ordered to spend it is just as logical for mainland corporates to buy real assets just as it made sense for the sub-prime borrowers in the US to take out mortgage loans they could not afford. So long as cheap money rolled and with it prices, be they of houses or copper, it made sense to be on the bandwagon. If prices kept rising, you were ahead. If they did not, someone else (the taxpayer) took the hit.

For the commodity gamble today you do not even need the greed merchants of Wall Street as intermediaries. Just go to your local state bank manager only too keen to show he has been following directions from Beijing and borrow enough for a few shiploads of metal or soybeans.

The stupid part comes when outside investors, the innocents who rely on the advice of private bankers owned by the very same investment banks pushing dodgy paper, believe the new investment banker hype that high growth, high profits and high asset prices are back and if you don't get on the bandwagon soon it will be too late. Is that where we are now?

Maybe not if China is really back to sustainable 8 percent growth, and other Asian developing countries are also showing renewed strength. But much of this looks fragile. India's mix of loose monetary policy and huge government deficits will push inflation back to 5 percent by early next year according to the Reserve Bank of India (central bank) which is also warning about the unsustainability of the public sector deficit. China's brief era of deflation is probably a thing of the past, Korea is worrying about a new property price bubble, Australia beginning to consider interest rate rises and worrying about the debt burden left by massive stimulus which has worked in the short run but has a long term cost.

As for China, investment spending will account for 75 percent or so of the 8 percent claimed growth. That will make China's economy even more unbalanced than it was before the crisis and raises huge question marks over the balance sheets of its banks. Expansion in their equity base has fallen far behind loan growth and threatens huge problems if the loans go sour. The Chinese Banking Regulatory Commission is clearly worried, urging banks to lend for real investment not speculation but more than words are needed to restrain the lending frenzy.

There is all too little sign of the changes that China needs if the underlying global imbalance problems are to be resolved: a shift from investment to consumption-driven growth in China, and a sharp decline in its external surplus. Given the reluctance of China to allow its exchange rate to appreciate, the onus is on the US consumer to stop consuming. Or on the US to promote further decline in the dollar which would infuriate China and ratchet up tensions between China, determined to keep its currency linked to the US, and other countries, notably those in Europe.

So though massive stimulus everywhere may have brought the global financial system back from the brink, underlying imbalances remain.