Chinese banks issued 1.62 trillion yuan (US$237 billion) in new loans in January, up 101 percent year-on-year, prompting some economists to say the government might not cut interest rates for the time being to boost the economy.

The massive jump in lending is equal to about one-third of the loans issued in the whole of 2008, a year that began on a generally tight credit line, the central bank said Thursday.

M2, which includes cash and all types of deposits and indicates overall liquidity in the financial system, grew in January, too, by 18.8 percent year-on-year. It increased 17.8 percent in December.

The massive growth in lending comes at a time when banks are rushing to cherry-pick the juiciest stimulus-package projects, especially major infrastructure ones that need long-term investment, the economists said.

The government announced a US$586-billion package on November 9 to boost domestic demand and shore up investment. Though the central government will shoulder one-third of the cost, banks will play an important role in financing the construction of bridges, railways and highways.

"The banks are fighting for the best projects in the government's stimulus package," said Ha Jiming, chief economist of China International Capital Corp. "It's not surprising to see that an array of the deals were sealed in the past month."

"The massive lending growth minimizes the need to further cut interest rates heftily," said Lian Ping, chief economist with Bank of Communications. "The liquidity problem should ease with such a growth."

The central bank has cut the benchmark lending rate by 2.16 percentage points in the past four months and reduced the deposit reserve requirement ratio in order to ensure there's enough liquidity in the market to boost the economy.

The growth in lending could also prove to be a blessing for cash-strapped domestic enterprises trying to stay afloat amid shrinking overseas demand and waning consumer confidence.

Central bank figures show bill financing, which supplies working capital, accounted for 39 percent of the new loans.

Medium and long-term corporate loans made up 32 percent.

"It (growth) reduces the default risks of domestic firms, which in turn eases worries over bank asset quality at least in the short term," said Sun Mingchun, an economist with Nomura International.

The economists said the dramatic rise in lending could be partly attributed to pent-up demand for loans last year.

The central bank had imposed a curb on lending till November last year to combat inflation and prevent the economy from overheating.

That left "many firms, especially small- and medium-sized ones, facing a severe cash flow problem", Sun said.

Policymakers lifted the curb in November and raised the target for M2 growth to 17 percent for 2009, up from 16 percent that had been in practice since 2006.

The move is expected to ensure there's enough liquidity in the market to spur investment and boost the economy, whose growth dropped to a seven-year low of 6.8 percent in the fourth quarter last year.

"Credit expansion in the first quarter of this year is expected to be very high because banks can maximize investment returns by front-loading new loans," said Jing Ulrich, managing director and chairwoman of China Equities at JP Morgan.

But Ulrich cautioned against a possible rise in credit risk because the increase in liquidity could cause a sharp rise in banks' non-performing loans.

(China Daily February 13, 2009)