China's central bank said on Friday that the growth rate of both M2, the broad measure of money supply, and M1, the narrow measure of money supply, slowed at the end of June 2006.

Statistics from the People's Bank of China showed that M2 grew 18.43 percent, down 0.62 of a percentage point from May, and M1 grew 13.94 percent, down 0.07 of a percentage point.

M1 is an antecedent index for national economic performance, reflecting the change in the amount of money in the hands of residents and enterprises, while M2 shows the demand of the whole of society and indicates possible inflation.

Meanwhile, China's RMB loans outstanding totaled 21.53 trillion yuan (US$2.7 trillion) at the end of June, up 15.24 percent from June last year, which was 0.73 of a percentage point lower than the January-May period.

New local currency loans totaled 394.7 billion yuan (US$49 billion) in June, 70.6 billion yuan less than the same period last year.

The decline indicated that a slew of government moves to rein in excessive lending and cool the economy were starting to work, analysts said.

Some economists and officials have expressed alarm at the surge in lending, saying it could lead to financial problems if investments are unprofitable. The investment-driven economy is growing at a pace of 10 percent.

The People's Bank of China responded on April 28 by raising the minimum rate commercial banks charge on one-year RMB loans by 27 basis points to 5.85 percent in an aggressive move to discourage lending. It was the first increase since October 2004.

It also required domestic commercial banks to raise their required reserves at the central bank by 0.5 percentage points starting on July 5.

The bank, however, left interest rates on deposits unchanged as increased interest could encourage savings and dampen spending at a time when China is hoping consumers will contribute more to economic expansion.

"Generally speaking, the current financial situation is stable," the central bank said in a statement.

But some experts still think RMB loans are growing too fast, which may lead to an economic bubble. In the first half, loans increased by 2.18 trillion yuan, making up 87 percent of the government's annual target.

The central bank, expected by most analysts to take further action to cool the economy, has several options to restrain loan growth and money supply, including raising interest rates and expanding the fluctuation range of the RMB exchange rate.

On July 18, China's National Bureau of Statistics will publish the GDP growth rate for the first half, and it is expected to exceed the 10.3-percent-rise in the first quarter and influence the decision-making of the central bank on future monetary policy.

(Xinhua News Agency July 16, 2006)