China's money supply continued to swell in July, showing little sign that the central bank's increasingly frequent open market operations will diffuse fears of inflation.

M2, the broad measure of money supply that covers cash in circulation and all deposits, soared by 20.7 per cent on a year-on-year basis to 20.62 trillion yuan (US$2.48 trillion) at the end of last month, the central People's Bank of China (PBOC) reported Monday.

Although the pace was slightly slower than the 20.8 per cent recorded at the end of June, it was not enough to alleviate fears among both central bankers and economists that inflation might ensue and new bad loans may be mounting.

The bank noted that the pace outstripped by 11.9 percentage points the sum of gross domestic product growth and the consumer price index in the first half of this year, adding: "Overall, the growth of money supply at present is on the fast side."

That echoed the central bank's comment two months ago when the M2 growth was recorded at 20.2 per cent, the fastest since August 1997.

The central bank subsequently ordered commercial banks to restrict property loans in order to avoid heating up the real estate sector, and scaled up contractive open market operations.

Some economists still believe the current level of money supply growth is needed to support national economic expansion and have been lobbying against radical measures they fear would cause unwanted shrinkage in the money supply.

New loans, a major driver of money supply growth, more than doubled from a year earlier to 1.88 trillion yuan (US$227 billion) in the first seven months of 2003, the PBOC said.

That figure was already 39.7 billion yuan (US$4.8 billion) more than the total new loans last year, it noted.

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