June 12 (Bloomberg) -- China’s new lending doubled in May and industrial output and retail sales climbed more than economists estimated as government stimulus spending revived the world’s third-biggest economy.

New loans jumped to 664.5 billion yuan ($97 billion) from 318.5 billion yuan a year earlier, the central bank said today. Industrial-output growth accelerated to 8.9 percent and sales rose 15.2 percent, the statistics bureau said.

Today’s data add to accelerating fixed-asset investment and surging auto and property sales in signaling that the government is successfully countering a slump in exports. Record lending is stoking concern that China’s recovery may come at the expense of inflating asset bubbles and adding to banks’ bad loans.

“These stronger numbers will support investor expectations for a V-shaped economic recovery,” said Ma Jun, chief China economist with Deutsche Bank AG in Hong Kong. “The pace of bank lending is dangerous and the risks include inflation, bad loans and economic volatility.”

M2, the broadest measure of money supply, rose 25.7 percent in May from a year earlier, the central bank said today, after a record 26 percent gain in April.

The yuan traded at 6.8338 against the dollar as of 2:36 p.m. in Shanghai, from yesterday’s close of 6.8348. The Shanghai Composite Index fell 2.7 percent, paring this year’s gain to 50 percent, amid speculation the government will soon allow initial share sales after an eight-month suspension.

‘Fragile’ Recovery

China’s five-year interest-rate swaps rose today to the highest in eight months on signs that the domestic economy’s recovery is picking up pace. Yuan forwards headed for the biggest weekly decline in almost two months as a record slide in exports showed that overseas demand remains depressed.

“The recovery is still fragile,” said Ben Simpfendorfer, an economist at Royal Bank of Scotland in Hong Kong. “This is an economy that is increasingly reliant on public demand. Aside from private residential property investment, private demand remains soft.”

Fitch Ratings said last month that it’s “increasingly wary” of China’s banking industry as it expects an increase in bad debts, and the nation’s banking regulator has urged lenders to ensure they don’t loosen management of loans.

Banks extended a record 5.84 trillion yuan of new loans in the first five months of 2009 after the government lifted lending restrictions and urged support for a stimulus plan focused on infrastructure spending.

‘Warning Sign’

“The rapid growth of credit should be regarded as a warning sign,” Andrew Crockett, a member of the China Banking Regulatory Commission’s international advisory committee, said in Beijing today. “Nearly always when we have financial difficulties at banking institutions, it’s preceded by rapid growth in lending,” said Crockett, also JPMorgan Chase & Co.’s international president.

The credit boom may help to end declines in consumer prices, which fell 1.4 percent in May from a year earlier. Inflation may bounce back faster than economic growth, State Information Center researchers cautioned this week.

The gain in industrial output outpaced the 7.3 percent increase in April and the 7.7 percent median estimate of 16 economists surveyed by Bloomberg News.

Cement output climbed 13.5 percent from a year earlier, while the gain for steel products was 7.4 percent. Electricity output declined 2.7 percent after a 3.5 percent fall in April.

Biggest Auto Market

The car industry is among the winners from government efforts to spur growth, as China extends its lead over the U.S. as the world’s biggest auto market this year. Auto output climbed 29 percent in May, the statistics bureau said.

General Motors Corp. boosted sales in China by 34 percent in the first five months of the year even as plunging U.S. demand forced it into bankruptcy.

Today’s industrial production number compares with a collapse in output growth to 3.8 percent in January and February combined. In May last year, production rose 16 percent.

Heavy industry played a key role in last month’s growth and the recovery in Sichuan province from last year’s earthquake accounted for 0.6 percentage points of the gain, the statistics bureau said.

Retail sales climbed the most in four months as furniture sales surged 33.3 percent and jewelry climbed 28.7 percent.

Falling prices and rising household incomes are encouraging spending, said Wang Qian, an economist at JPMorgan in Hong Kong. The boost to confidence from rising stock prices has also spurred sales, along with expectations for inflation to return, she said.

China’s economy expanded 6.1 percent in the first quarter from a year earlier, the weakest pace in almost a decade. Full- year growth may be 7.5 percent, according to a Bloomberg News survey of economists last month.

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

Last Updated: June 12, 2009 02:39 EDT