Although the People's Bank of China (PBOC) had significantly raised its money supply growth target to 17 percent for 2003 after two upward revisions last year forced by rapid rises in loans, it still underestimated the real momentum, for the first quarter at least.

M2, the broadest measure of money supply that covers cash in circulation and all deposits, jumped by 18.5 percent in March on a year-on-year basis. That was faster than the 18.1 percent in February, but down from January's 19.3 percent.

Analysts say a key reason for the unexpectedly fast M2 growth, again, was a fast increase in commercial lending as a result of improving economic activity.

A rebound in prices across the sectors of real estate, steel, automobile and building materials that started in the latter half of last year, and climbing sales are boosting the expected rate of return at both banks and businesses, they said, rekindling the lending desire by Chinese commercial banks that had long held their funds on bad loan fears.

"We have moved from the government pushing the banks to lend to a situation where spontaneous lending becomes another pillar," said Wang Yuanhong, a senior analyst with the State Information Centre.

For example, new loans by the Industrial and Commercial Bank of China, the country's largest commercial bank, quadrupled in the first quarter to 178 billion yuan (US$21.5 billion).

And last year's monetary policy moves, from the PBOC's push for meeting the funding needs of small and medium-sized enterprises (SMEs) to the upshift in money supply, are finally having effect after a "time lag" expires, analysts say.

"The effect was being shown," Wang said, "it was just stronger than expected."

Optimists see the current pace as appropriate in supporting an economy in transition, saying that the rapid growth in money supply is necessary as a broad technical upgrade goes on at businesses and people replace their durables from home appliances to computers at a faster pace.

Others are more critical, noting that the growing money supply failed to quench the thirst for funds of SMEs and farmers, and some "unhealthy elements" have appeared.

"What is bad is that it outstripped the macroeconomic target," said Wang Zhao, a researcher with the Development Research Centre (DRC) under the State Council. An M2 growth pace faster than 18 percent, a line Wang said should not be surpassed in achieving an intended 0-1 percent inflation rate, could create economic bubbles.

"There are elements of bubbles, or a tendency in that direction," he warned, citing the growing number of "municipal plazas" that are being built in front of city government offices across the country with loans guaranteed by local governments.

"More importantly, problems with SMEs and rural areas remain unsolved," he said, referring to a stubbornly persistent funding shortage among Chinese SMEs and farmers as banks shy away from the high costs and risks.

PBOC officials have not openly commented on the money supply growth in the first quarter, but insiders said "some (in the central bank) are concerned about inflation."

The central bank has already required commercial banks to tighten real estate loans and is reportedly considering raising down payment requirements on luxury homes to prevent a looming glut in the market.

The sector, in which investment soared by 34.9 percent in the January-March period, is the primary source of concerns among some economists that the economy is overheating in some industries.

Overall, deflationary worries still seem to outweigh inflationary jitters among economists, as the consumer price index (CPI), the key barometer for inflation, has been just three months in the positive territory and private spending, with little support from income rises, remains weak.

China's CPI chalked up a 0.5 percent rise in the first quarter of the year, the first quarterly increase since November, 2001. That cheered economists who had been worried that deflation may erode growth momentum in the Chinese economy, which grew an impressive 9.9 percent in the first quarter.

"We finally have inflation," investment bank Goldman Sachs exclaimed in a statement release on Thursday after growth figures were announced. But the banking sector needs to be able to channel funds effectively to SMEs and the private sector to make inflation remain, it said.

"It's too early to say that we have stepped out of deflation," said DRC's Wang, attributing the CPI rebound partly to factors including Spring Festival and the increase in oil prices as a result of the war in Iraq.

Should the growth in money supply slacken, which Wang said is likely due to the "unhealthy elements," "deflation will return," he said.

(China Daily April 21, 2003)