China surprised in the second quarter with GDP growth of 7.9%. But this time around the Red Dragon isn't sneaking up on anyone. Central government leaders, state media, economists, and investors all believe China's economy expanded by about 9% in the third quarter.

Bank of America Merrill Lynch estimates the Chinese economy expanded by 9.2% year-over-year in the third quarter.

Economists polled by Thomson Reuters think annual GDP growth accelerated to 8.9% in the three months ended in September, which would still be the highest rate of growth in a year.

And the Shanghai Composite Index yesterday rose as high as 3,105.51, its highest level in two months, after Vice Premier Li Keqiang said the economy had been growing faster every month and that the overall recovery had been improving.

The challenge for Beijing now is reigning in lending without spooking investors and continuing to move the economy to a point of greater stability and balance.

"This has been growth on steroids," Michael Pettis, a Peking University finance professor and former head of emerging markets at Bear Stearns Cos, told Bloomberg. "The question now is how to stop pumping so much money into the system without a sharp reduction in growth."

China has already begun the process of winding down bank lending.

Chinese banks have lent a record-high $1.27 trillion this year. That equates to about 50% of the nation's total GDP and the amount of loans extended throughout all of 2008. But $1.08 trillion of that sum was doled out in the first six months of the year. That surge in lending has resulted in a huge increase in public and private investment, retail sales, and infrastructure development, but it has also increased inflation expectations.

Beijing acknowledged as much in a statement earlier this week.

"The policy focus of the next few months is to balance the need to maintain stable and relatively fast growth, the need to adjust the economic structure and the need to better manage inflationary expectations," the State Council said in a statement.

The People's Bank of China (BOC) issued a similar statement in an a report analyzing second-quarter economic trends, issued by its Financial Survey and Statistics Department.

"Commodity markets around the world have bottomed and are rebounding, raising imported inflation pressures," the report said. "At the same time, domestic demand continues to rebound, liquidity remains flush and inflation expectations are surfacing."

Commodities prices have leapt considerably since that report's release, with oil above $80 a barrel and gold well over $1,000 an ounce.

Inflation in China has not yet returned to the problematic levels it reached a year ago, which means the central bank will likely be able to maintain its "moderately loose" monetary policy. However, the BOC may consider raising interest rates as soon as early 2010.

"They are cautious about the speed at which inflation will return," said Ben Simpfendorfer, an economist with Royal Bank of Scotland Group PLC (NYSE ADR: RBS), told Bloomberg. "It's not a change of policy tone yet, but I think we will get that change in the first quarter of next year."

Ideally, the central government would like to see a stronger rebound in exports before it reverses its monetary policy. Exports contracted by 15.2% year-over-year in September, which was the slowest rate of decline of any month this year.  Exports fell by 23.4% in August.

If this trend continues China may be able to maintain its rapid growth without overly expansive monetary policy. Net exports could contribute 0.5 percentage points to growth next year after shaving 3 percentage points from this year's GDP, Wang Tao, an economist at UBS AG (NYSE: UBS) told Bloomberg.