"Although the 2.6 trillion yuan level of new loans is lower than last year, it is still the second highest in history," it said. And that "will not lead to a 'hard-landing'."

The report predicted China's gross domestic product (GDP), consumer price index (CPI) and new loans will all remain in the fast lane for the second quarter of the year, but will slow down in the third quarter as the impact of recent policy initiatives starts to be felt.

The report came amid growing concerns that China may resort to drastic tightening measures, such as an interest rate rise, to cool down an investment frenzy and rapid loan growth, and soothe growing inflationary pressures.

Such concerns were fuelled particularly by a China Banking Regulatory Commission circular at the end of last month requiring banks to tighten lending, leading to a broad fall in the stock market.

"The report will presumably play a stabilizing role," said Wang Yuanhong, a senior analyst with the State Information Center, an influential think-tank.

"It suggests, at least, that there will no more major monetary action before the end of June," he said. "And it demonstrates the central bank's confidence that economic growth will not suffer abrupt fluctuations."

Rumors abounded last month of an imminent interest rate rise, as increasing numbers of economists who are sceptical about the effect of the central bank's recent tightening measures are calling for stronger measures to rein in the nation's breakneck investment growth.

Fuelled by faster-than-expected loan growth, China's fixed investment soared by 43 percent on a year-on-year basis in the first quarter of this year, close to levels seen in the overheated early 1990s, while CPI rose by 2.8 percent as compared to months of negative growth in much of last year.

Central bankers have stressed they would wait to see if monetary actions - mainly the two increases in bank reserve requirements that took effect late last month - could work as expected before they take further steps.

The central bank said yesterday the possibly fast growth of GDP, CPI and loans in the second quarter, largely due to a slowdown one year earlier as a result of the SARS outbreak and the lagged effect of monetary policy moves, is "well expected" and "could not prove monetary policy is ineffective."

But it acknowledged that investment is showing signs of overheating in some areas and pledged to contain the trend "decisively."

Overinvestment has aggravated coal, electricity and oil shortages, hampered the structural optimization of the economy and heightened inflationary pressures, it said.

Such overinvestment and rapid monetary growth are mutually reinforcing, the central bank noted.

By the end of February, investment projects in such overheated areas as steel, cement and aluminium, which grew by staggering 107 percent, 101 percent and 39 percent respectively in the first quarter, were 42 percent funded by bank loans.

"Overheated investment is often accompanied by overheated lending, which are typically followed by the accumulation of huge non-performing assets and a major economic slowdown," the report said.

Inflationary pressures in investment products, a direct consequence of overinvestment, are likely to feed through to consumer prices, it said.

The CPI, the key gauge for inflation that rose by 2.8 percent in the first quarter, is likely to climb further in April and subside in the third quarter.

As a result, the central bank said its prudent monetary policy stance will be tilted towards "moderate stringency" in the near term.

It pledged to use various monetary policy tools to ensure "appropriate growth" in loans, and vowed to step up open market operations to adjust liquidity at commercial banks.

New loans in the first quarter stood at 835.1 billion yuan (US$100 billion), or 32 percent of the full-year target, while money supply growth registered 19.1 percent, far outpacing the 17 percent target.

This year's target for economic growth is 7 percent, which compares to last year's 9.1 percent and an even stronger 9.7 percent for the first quarter.

(China Daily May 12, 2004)