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Chinese bank lending slowed dramatically in April because of fears that loan growth in the first quarter had been excessive and could pave the way for loans of deteriorating quality, so possibly creating a new round of asset bubbles.

China’s state-dominated banks gave out Rmb591.8bn ($85.2bn, €62.5bn, £56.3bn) in new loans last month, less than a third of the Rmb1,891bn in new loans extended in March, but still well above the monthly levels of recent years.

In the first quarter, Chinese lenders answered the government’s call to open the credit taps and get the economy moving again, extending more than Rmb4,600bn in new loans – more than the entire amount of new lending in 2007.

That led to fears among regulators that money was being funnelled illegally into the stock market and handed out to state-sponsored stimulus projects of dubious commercial value that could become non-performing assets.

Some regulators also worried about the potential for rampant inflation. Those fears were somewhat eased by price measurements released on Monday showing China remained in deflationary territory in April for the third consecutive month.

The consumer price index fell 1.5 per cent from a year earlier in April, compared with a fall of 1.2 per cent in March, while the producer price index fell 6.6 per cent after falling 6.0 per cent in March.

Chinese bank lending is usually strongest in the first quarter and moderates as the year goes on. However, the abnormally steep April drop raises some concerns that China’s nascent economic recovery could flounder without the injection of huge volumes of new loans.

Nonetheless, many analysts were sanguine that reduced loan levels would still buoy growth. Wang Tao, economist at UBS, said: “April new lending is much more sustainable than that in Q1 and especially that in March, and the natural tapering off does not mean that growth will slow down. We continue to think that there will be enough liquidity to support an economic recovery (estimated at 7.5 per cent gross domestic product growth) for 2009.”

Most of the loans in the first quarter were to government-backed infrastructure projects. Many smaller private enterprises have complained that they are still unable to access credit from the banks, in spite of the flood of new lending.

Ben Simpfendorfer, an economist with RBS in Hong Kong, said: “The central bank noted in its quarterly monetary report that private investment sentiment remains weak and warned that slower profit and wage growth might yet be a drag on consumption.”

This is a worry for Beijing, which is trying to shift the economy away from relying on exports and more towards domestic consumption.

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