March 12 (Bloomberg) -- China’s new loans more than quadrupled in February from a year earlier after the government pressed banks to support a 4 trillion yuan ($585 billion) stimulus package for the world’s third-biggest economy.

Banks extended 1.07 trillion yuan of local-currency loans, the central bank said on its Web site today. M2, the broadest measure of money supply, climbed 20.5 percent from a year earlier, the fastest pace in more than five years, after growing 18.8 percent in January.

The lending, which adds to a record 1.62 trillion yuan of new loans in January and a surge in investment, may help to revive growth as an export collapse closes factories and eliminates millions of jobs. Chinese banks, which have side- stepped the toxic assets that crippled lenders in the U.S. and Europe, risk an increase in bad loans this year in a weakened economy, according to Fitch Ratings.

“The pace of lending in January and February is certainly unsustainable and dangerous to the health of the financial system,” said Sherman Chan, a Sydney-based economist at Moody’s Economy.com. “Lax credit assessment right now may lead to a surge in delinquencies in the years to come.”

New yuan loans in February 2008 were 243.8 billion yuan, according to earlier central bank data. Outstanding yuan- denominated loans at the end of last month were 33 trillion yuan, 24.2 percent higher than a year earlier. The gain in M2, to 50.7 trillion yuan, was the fastest since October 2003.

Pumping Liquidity

“Chinese banks are actually gearing up and pumping liquidity into the economy,” said Sun Mingchun, an economist at Nomura Holdings in Hong Kong.

Urban fixed-asset investment climbed a more-than-estimated 26.5 percent in January and February combined, the statistics bureau said yesterday. Exports tumbled 25.7 percent in February, the customs bureau said, the biggest decline since Bloomberg data began in 1995.

China’s loan surge contrasts with the U.S., where Treasury Secretary Timothy Geithner is trying to spur bank lending.

Chinese banks have less than 1 percent of the $1.2 trillion of losses and writedowns reported by financial institutions as a result of the crisis triggered by defaults on U.S. mortgage payments. They stepped up lending after the central bank removed quotas in November last year and the government urged support from lenders for the 4 trillion stimulus.

Policy Fine-tuning

Central bank Governor Zhou Xiaochuan said March 6 that loans and money supply may have grown too quickly. Still, he said, it was best to act quickly and forcefully to revive growth and fine- tune policies later.

Premier Wen Jiabao announced on March 5 a target for lending this year of 5 trillion yuan, meaning that the banks are halfway there with 10 months to go.

The surge in credit has triggered concern that some of the money is being pumped into the stock market.

“Our general assessment is that the fundamentals of these loans are normal,” China Banking Regulatory Commission Chairman Liu Mingkang said Feb. 26. Given such a rapid decline in economic growth, “it’s necessary to boost the intensity and pace of credit support to help companies in difficulties.”

Bank of China Chairman Xiao Gang said last week that the sharp rise in lending in January and February was “normal” because of pent-up demand caused by previous restrictions and the “frontloading” of credit so that lenders start earning interest income immediately.

Bad Loans

China spent about $650 billion recapitalizing its largest banks in the past decade as government-directed lending led to a surge in bad loans.

Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., and Bank of China are now the world’s three largest lenders by market value after selling shares to the public and complying with international accounting and capital adequacy rules.

Growth in M1, the narrow definition of money supply, rose 10.9 percent to 16.65 trillion yuan at the end of February from a year earlier, recovering from a slump to 6.7 percent in January, today’s statement said.

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Last Updated: March 11, 2009 22:37 EDT