June 25 (Bloomberg) -- China’s central bank pledged to keep pumping money into the financial system to support a recovery in the world’s third-biggest economy.

The economy is in a “critical” stage and the central bank will maintain a “moderately loose” monetary policy, the People’s Bank of China reiterated in a statement on its Web site today after a quarterly meeting.

The central bank triggered an explosion in credit by scrapping quotas on lending in November to back the government’s 4 trillion yuan ($585 billion) stimulus plan. Record lending is stoking concern that a recovery may come at the expense of asset bubbles, bad debts for banks and inflation in the long term.

“They want to continue the policy support for growth,” said Peng Wensheng, an economist with Barclays Capital in Hong Kong. “The recovery accelerated quite significantly in the second quarter but it’s from a low base.”

China’s economy grew 6.1 percent in the first quarter from a year earlier, the least in almost a decade, after exports slumped. The external environment remains “severe,” the central bank said today.

While the economy is showing positive signs, it’s yet to establish a solid recovery, the People’s Bank of China said, echoing previous government statements.

The bank pledged “continuity and stability of monetary policy” and said it would guide “reasonable growth” in money supply and credit.

‘Increasingly Wary’

Fitch Ratings said last month that it’s “increasingly wary” of China’s banking industry because of the risk of bad debts. Inflation may bounce back faster than economic growth, State Information Center researchers cautioned this month.

The Shanghai Composite Index has climbed 61 percent this year and economists have upgraded forecasts for China’s growth on gains in lending and investment and a recovery in industrial production.

“We are starting to move to the point where policy is inappropriately loose,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “We’re seeing more convincing evidence that the worst is behind us for the global recovery.”

The Organization for Economic Cooperation and Development raised yesterday its estimate for China’s growth this year and said stimulus measures may spark the biggest boom in urban investment since the early 1990s. The nation’s economy will grow 7.7 percent, the Paris-based group said.

That would be close to the government’s 8 percent target for creating jobs and maintaining social stability.

Borrowing Costs

The central bank has kept interest rates and banks’ reserve requirements unchanged this year after cutting them in the final four months of 2008 as the global financial crisis deepened.

The key one-year lending rate is 5.31 percent and the reserve requirement, the proportion of money that lenders are required to park with the central bank, is 15.5 percent for big banks and 13.5 percent for smaller ones.

Bank shares climbed on June 23 on speculation that the central bank could reduce reserve requirements.

Policy makers are unlikely to make reductions in the “near term” as liquidity between lenders remains ample, the Shanghai Securities News reported on June 24, citing unidentified “authorities.”

Banks are set to lend more in June than in May, the same newspaper reported June 22, citing unidentified sources. Last month, new loans more than doubled from a year earlier.

To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

Last Updated: June 25, 2009 06:46 EDT