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Big growth in China's lending, M2 levels

China's new lending and money supply growth both surged to record highs in March, as banks continued their explosive credit expansion in support of the government's efforts to rejuvenate the economy.

Banks extended 1.89 trillion yuan (US$276.6 billion) in local currency-denominated loans in March, bringing the first quarter total to 4.58 trillion yuan and nearing the government's full-year target of at least 5 trillion yuan, the People's Bank of China said yesterday.

That helped lift annual growth in the broad M2 measure of money supply to a record 25.5 percent in March, up from 20.5 percent in February and easily exceeding economists' expectations of a 21.3 percent rise.

Liquidity surged despite the smallest quarterly rise in the foreign exchange reserves since the second quarter of 2001, reflecting slowing inflows through the trade surplus and foreign investment.

Reserves rose just US$7.7 billion in the first three months, reaching US$1.9537 trillion at the end of March.

Analysts saw the lending figures as a sign that government moves to boost domestic demand were working, but cautioned against jumping to a conclusion that a rebound was on the immediate horizon.

"China has completed over 90 percent of its full-year target for bank lending in the first three months, and this is absolutely not sustainable," said Zhang Xiaojing, an economist with Chinese Academy of Social Sciences in Beijing.

"In addition, I don't think we can say that the worst time for the Chinese economy is over," he said. "The March lending is strong, but whether the strong growth in bank credit can revive the real economy sector is still unclear."

One of the main concerns about the lending surge has been it could be financing stock market speculation as much as investment and spending, as reflected in the high proportion of short-term bill financing in the totals.

Discounted bill financing, which firms use for short-term cash needs, accounted for 1.48 trillion yuan of the first quarter's new lending, or 32.3 percent of the total.

The People's Bank of China did not give a breakdown of the proportion for March, but it appears to have fallen, which economists would see as a good sign.

The surge in growth in the narrower M1 measure of money supply, to 17 percent in March from 10.9 percent in February, will likely be taken as a sign that businesses and consumers are switching more money to demand deposits, not included in M2, as they prepare to ramp up spending.

The external challenges from the financial crisis are reflected in part by slower foreign exchange reserve accumulation. China's reserves fell by US$32.6 billion in January, their biggest monthly drop on record, the central bank data showed yesterday. They fell again in February then rose by US$41.7 billion in March.


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