By staff reporters Wen Xiu, Fang Huilei and Wu Ying
　　　
(Caijing Mazagine)China's banks approved a combined 4.58 trillion yuan in new loans during the first quarter – a remarkable cash surge equal to the total amount of bank lending for all 2008.

It shocked some to see the credit floodgates open smack in the middle of a global financial crisis. Even more surprising was that, a month into the second quarter, lenders were showing no sign of letup; neither the market nor government policies appeared to be putting on the brakes.

One of the only hints of a possible slowdown came April 15, when China Banking Regulatory Commission (CBRC) Chairman Liu Mingkang called for "moderating" the loan pace.

But the loan writing has continued, raising key questions for China's economy. Has this trend -- fanatical to some, sensible to others -- helped ease deflation and actually bolstered the economy? Or has it raised inflation risks and damaged financing mechanisms?

To what extent will bank lending grow or contract in the future? And what may be the consequences for China's financial markets and Main Street economy?

The country's key policymakers are offering few answers to these and other difficult questions. Neither are they willing to guess. "It's still too early to come to a conclusion," declared Yi Gang, deputy governor of The People's Bank of China, at a recent press conference.
It may be hard to tell whether the credit rush will help China's economy recover from the effects of the global downturn. But risks and opportunities are becoming increasingly clear.

Credit Competition

Through most of April, some large banks were scaling back on new loans. The net effect, however, was zero.

According to a senior executive at a large commercial bank, April lending overall exceeded February's level. What appeared to be a slowdown actually may have been just a temporary pause by banks following their lending craze in March.

Lending reached a peak during the last two days of the first quarter, bringing total loans for March alone to 1.89 trillion yuan. That beat the monthly record set in January -- 1.62 trillion yuan.

According to internal data, only one of China's big Four Banks -- China Construction Bank -- stopped issuing loans for a short period during the first quarter. The pause came on the last two days of March.

But other members of the Big Four club -- ICBC, Bank of Agriculture and Bank of China -- actually accelerated credit outlays as the quarter drew to a close. The largest single loan was 120 billion yuan.

China Construction Bank, according to an inside source, had decided to curtail what it considered excessive lending by its local branches, which were using credit programs to increase market share. Credit reviews were tightened, and lending shrank to extremely low levels.