The Central Bank Research Department says the surge in the new loans granted by Chinese banks is continuing, raising concerns that the money is being used to inflate the stock market instead of flowing to the manufacturing sector.

The research department's quarterly review of the national economy says there has been a huge increase in local-currency loans drawing on the data in the first twenty days of March. It concludes that the threat of deflation is retreating.

"Although official data for the whole month are not available yet, the figure for new loans in the first 20 days shows an obvious upward trend," said Zhang Jianhua, director of the research department. "Most of the loans have gone to government-backed investment projects. The banks are really trying to target projects that support the government stimulus plan."

Since the government loosened the credit market at the end of last year, bank loans have expanded to a record level.

Chinese banks extended loans totaling 1.62 trillion (US$238?billion)?and 1.07 trillion (US$157 billion)?in January and February.

"The expansion of lending is really more like an explosion," said Zhang.

In his government work report to this year's National People's Congress meeting, Premier Wen told banks to boost lending by 5 trillion yuan in 2009 to help fund the government stimulus package, but that figure will be breached in the first half of this year at the current rate of expansion.

"As things stand, we are likely to see sustained loan growth for the rest of the year," said Zhang Jianhua.

But there are mounting concerns about where the loans are really going, especially in the present economic climate.

Yuan Gangming, a researcher at Tsinghua University, is worried that the money is not going to the real economy. Instead, he says, a considerable amount is moving around in the financial sector.

"The recent rebound of the stock market has something to do with the new loans. We guess that much of the money has found its way into the stock market," said Li Xunlei, the chief economist of Guotai Junan Securities, echoing Yuan's view.

"But this is just guesswork on our part," Li added.

While most stock indexes around the world have fallen more than 10 percent so far this year, the Shanghai stock exchange has rallied 30 percent.

(China.org.cn by He Shan, March 30, 2009)