July 9 (Bloomberg) -- A surge in China’s lending is boosting concern that attempts to revive the world’s third- largest economy will lead to bad debts and asset bubbles.

New loans rose almost fivefold in June from a year earlier to 1.53 trillion yuan ($224 billion), the central bank said on its Web site yesterday. The June number is a preliminary calculation, the People’s Bank of China said.

Chinese banks have extended 47 percent more loans this year than the central bank’s minimum target for 2009, after the government eased lending restrictions to counter an export collapse. The benchmark stock index climbed 69 percent this year, property prices rebounded, and the banking regulator cautioned this week that rapid credit growth poses risks for lenders and the financial system.

“China needs a solid economic recovery right now, not an asset-price bubble,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney.

The Shanghai Composite Index rose 0.4 percent as of 9:51 a.m. local time today.

First-half lending rose to a record 7.37 trillion yuan, more than three times the amount a year earlier. June’s lending was more than double that of May.

Rapid credit growth poses risks for the nation’s lenders and excessive concentrations of credit can undermine financial stability, the China Banking Regulatory Commission said July 7.

‘Wasteful’ Investment

“Excess liquidity is fueling speculation and that means asset bubbles and wasteful investment,” said Isaac Meng, a senior economist at BNP Paribas SA in Beijing. “Expect credit to slow dramatically in the second half.”

New lending in the next six months could be as little as one quarter the total in the first half as policy makers move to rein in credit, Meng estimates.

That tightening may have already begun. The central bank said it will resume the sale of one-year bills today after almost eight months, fueling speculation it is seeking to reduce cash in money markets and rein in lending.

“The message to the banks is clear,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong. “Stop lending and start buying bonds.”

China failed yesterday to complete a 28 billion-yuan government bond sale for the first time as the central bank withdrew cash from the financial system.

The Ministry of Finance sold 27.5 billion yuan of one-year notes at a yield of 1.06 percent, compared with 0.89 percent at the last auction of similar-maturity debt in May, according to Chinabond, the nation’s biggest debt-clearing house.

‘Extremely Loose’

Rising interbank market yields since last week show that the central bank has started fine-tuning monetary policy to neutralize a flood of liquidity, said Xing Ziqiang, an economist at China International Capital Corp. in Beijing.

The sale of one-year bills is a tweaking of policy away from an “extremely loose” stance, Goldman Sachs Group Inc. said.

“We still believe policy makers will likely keep a growth- supportive stance in macro policies, even when they adopt some small tightening like this to absorb excess liquidity on the margin,” economists led by Helen Qiao wrote in a research note late yesterday.

China’s housing sales surged 45.3 percent in the first five months as the government’s 4 trillion-yuan stimulus plan stoked investment and domestic demand. Economic growth slowed to 6.1 percent in the first quarter, the weakest pace in almost a decade, as exports shrank amid the global recession.

Part of the surge in June lending “likely reflects strong mortgage loan extension, given the booming property markets recently,” said Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong.

The central bank must provide stricter guidance to banks to rein in loan growth, Maguire said. An increase in the portion of reserves banks must hold as deposits is now likely as early as September, he said.

Ten of fifteen economists surveyed by Bloomberg News said that the reserve ratio will not be increased this year.

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

Last Updated: July 8, 2009 21:57 EDT