CHINESE banks lent more than expected last month, adding to signs of an economic recovery but also arousing worries over financial instability amid the quick credit growth.

Chinese banks extended 1.06 trillion yuan (US$171.2 billion) of new yuan loans in March, the People's Bank of China said in a statement yesterday, above economists' estimates of 850 billion yuan in a Bloomberg News survey.

The March lending was also near a three-year high of 1.07 trillion yuan in January, and was 440 billion yuan more than February.

"The strong first-quarter results reflect pent-up demand from the end of 2012 and a pickup in demand after the Chinese New Year holiday," Barclays said in a report yesterday.

The data showed the banks are comfortably on target to extend 9 trillion yuan in new credit this year and signals the government's stance to keep credit flowing to underpin growth while inflation remains benign, analysts said.

Total social financing - an indicator of overall liquidity which includes bank loans, bonds, equity financing, foreign direct investment, bankers' acceptances, direct company lending and external debt - was 2.54 trillion yuan in March, more than double that in February.

M2, the broader measure of money supply, rose 15.7 percent in March, faster than an increase of 15.2 percent in February and above an annual target of 13 percent.

But the credit boom aroused worries over credit quality and the outlook for inflation.

"Despite increasing funding constraints, local governments have resorted to trust financing and bond issuance and enjoyed low financing costs not compatible with the underlying risks, due to a perceived implicit guarantee or bailout prospects," Barclays' report said.

On Tuesday, Fitch downgraded China's sovereign rating from AA- to A+ on concerns about the government's liabilities.