This aggressive pump-priming helped the mainland economy expand 7.1 per cent in the first half and 7.9 per cent over the second quarter. Fixed-asset spending in factories, property and infrastructure surged 33.6 per cent in the first six months of the year.

With Beijing anxious to meet its 8 per cent full-year growth target, the figures appear on paper to be vindication of the government's efforts to kick-start the economy.

There is a hitch, however. Beyond the quick boost to gross domestic product numbers and market sentiment, the nation's stimulus efforts so far have meant little to small and medium-sized firms. The majority of these companies - privately held and arguably the nation's biggest urban employers - are feeling left behind.

Left unaddressed, the widening gap between the state and private sectors risks setting back the mainland's pursuit of a market economy. The giant state-owned enterprises continue to be pampered, with generous government and bank funding for power grids, toll roads and other infrastructure projects. The private sector, in the meantime, is suffering from a lack of funding and its survival is now in question.

'We are witnessing the advance of the state-owned industries and the receding of the private sector,' said Ren Zhiqiang, an outspoken economist and president of Huayuan Group, a state-owned property developer. 'SOEs are growing and becoming more and more monopolised.'

The Chinese Academy of Social Sciences, a state-backed think tank, revealed last month that 40 per cent of the mainland's estimated 42 million private small and medium-sized enterprises have collapsed due to the economic downturn. Another 40 per cent are teetering on the brink.

Despite the huge amount of money sloshing around the mainland economy, not much of it is reaching capital-starved private companies.

It is estimated 31 per cent of new loans flowed into the property sector and the stock market, while another 50 per cent went to the big state firms that undertake government stimulus projects. Only a small fraction of the capital may have found its way to floundering smaller private companies.

Since Beijing announced a 4 trillion yuan stimulus scheme in November last year, banks have competed aggressively to extend loans to winners of big government projects - mainly big state firms. Of the 7.37 trillion yuan of incremental loans in the first half of the year, 6.31 trillion yuan was extended to non-financial companies. About half of the lending was medium to long-term loans, totalling 3.17 trillion yuan, according to data released by the People's Bank of China on Wednesday.

Merrill Lynch economist Lu Ting said most of these loans went into fixed-asset investments, accounting for 50.8 per cent of June's total new loans, compared with 52.4 per cent in May and 34.4 per cent in February.

'This rapid rise has been driven by loans to developers and local government investment as Beijing cut capital requirements for most infrastructure and real estate projects,' said Mr Lu.

Loans for developers in the first six months of the year rose 33 per cent year on year to 538.1 billion yuan and housing mortgages surged 63 per cent to 282.9 billion yuan, the National Bureau of Statistics said. This meant the property sector has absorbed at least 11 per cent of the new loans.

But more worrying was that some of the money is flowing into equities, pushing up the benchmark Shanghai Composite Index to become one of the world's leading gainers.

Wei Jianing, a researcher at the State Council's Development and Research Centre, estimated about 20 per cent of the new loans in the first half were channelled into the stock market, contributing to a 63 per cent rally in the Shanghai index.

Small and medium-sized enterprises have received less than 5per cent of the 4.8 trillion yuan in new loans banks made in the first half, said Minister of Industry and Information Technology Li Yizhong last month.

China's broad M2 measure of money supply rose 28.46 per cent to a record last month after banks pumped massive amounts of loans into the economy. Explosive lending could also lead to more non-performing loans.

'With liquidity so abundant and inflation expectations supporting a return to real assets, the domestic engines of growth are clearly pulling their weight,' said Jing Ulrich, chairman of China equities at JP Morgan.

'We are, however, concerned about the allocation of bank lending, as China's small and medium enterprises continue to be underserved by the formal financial system.'

The mainland banking system remains dominated by lenders in which the central government is the controlling shareholder. Banking licences are strictly controlled.