The recent surge in bank lending cooled dramatically last month, but the central bank vowed to encourage moderate growth in both money supply and lending. New loans shrank to 591.8 billion yuan (HK$672.23 billion) from the record high of 1.89 trillion yuan in March, the People's Bank of China revealed yesterday. However, the year-on-year growth rate remained strong at 29.72 per cent, barely changed from March. Deputy governor Su Ning said the central bank would be flexible in deploying tools such as interest rates and reserve ratios on lending to sustain economic growth. Mr Su said funds should be channelled to areas such as agriculture, infrastructure and technology upgrades rather than factories with excess capacity. Many economists, who regarded last month's loan growth as healthy, forecast the central bank would step up the regulation of new lending to minimise the risk of rising non-performing loans. 'Monthly growth in new loans will likely slow down to about 25 per cent towards the end of this year, as monetary policy will remain in an easing mode,' Bank of America Securities-Merrill Lynch economist Lu Ting said. 'There are worries that strong lending growth would lead to a sharp jump in non-performing loans (NPLs), but I think more worrying is potential NPLs arising from the economic slowdown.' Bank lending shot through the roof in March, weeks after the central government launched 4 trillion yuan of spending on infrastructure, rural development projects, real estate, education and the environment to jump-start economic growth. China Banking Regulatory Commission chairman Liu Mingkang conceded last month that the risk of NPLs would inevitably rise as a result of higher new lending growth, but sufficient provisions for bad debts and a high reserve ratio meant risks were 'manageable'. Mr Lu would not be surprised to see the banking watchdog tighten regulations on monitoring fund flows, which he thought would be necessary. 'The market should gain more confidence if the CBRC performs due diligence to make sure the loans are channelled to the real economy instead of speculation,' he said. A Goldman Sachs research report viewed last month's loan growth positively, saying it was more than enough to keep the mainland economy on a recovery track. 'We believe policymakers will maintain the growth-supportive stance in economic policies and remain tolerant on domestic credit expansion in the near future,' it said. Nomura International (Hong Kong) economist Sun Mingchun expected the PBOC to keep interest rates unchanged for the rest of the year, because of ample liquidity. Economists said the central bank's loose monetary stance this year was warranted but they expected deflation to abate later this year. The consumer price index contracted 1.5 per cent last month from April last year, a decline that was greater than the 1.2 per cent registered in March.