By JASON LEOW in Shanghai and ANDREW BATSON in Beijing

China's government is considering measures to regulate the torrent of bank lending, arising from concerns that much of the credit surge that has helped keep the economy growing could be wasted.

A senior official at a local branch of the China Banking Regulatory Commission said the commission is considering rules aimed at ensuring that loans go to the real economy, such as government stimulus projects, rather than being diverted into the asset markets or bank deposits. A spokesman confirmed Monday that the rules are being circulated internally for comment.

How Beijing manages the flow of credit in coming months will be critical to the country's trajectory of growth. The explosion in China's bank lending this year -- compared with the contraction in credit in many Western countries -- has been crucial to shoring up consumer and business confidence, and to keeping China's economy expanding.

A sharp cutback in credit would run the risk of derailing the nascent improvement, and is precisely what officials aren't planning to do. But they aren't pushing on the accelerator, either. The central bank has put interest-rate cuts on hold since December. The government is also expressing concern that the lending surge could be adding to financial risks or isn't directly aiding businesses in need of cash.

"Banks ought to fully realize that dealing with the impact of the crisis is a long-term task, and should pay close attention to risks accumulated from a burst of lending," the head of China's banking regulator, Liu Mingkang, said at the agency's quarterly meeting last week.

He said he is concerned banks aren't properly checking borrowers, are lending too much to a few favored clients, and are doing too much short-term lending. Despite such problems, Mr. Liu also said Saturday that "the risks are controllable, because we have instructed banks to step up their checks on lending practices." He emphasized that banks have lots of room to continue to lend this year.

The government's concerns derive from the size and unusual structure of bank lending in China so far this year. In the first three months of 2009, China's banks extended 4.58 trillion yuan ($640 billion) in new loans -- nearly as much as all new lending for 2008 and equivalent to around 70% of the nation's gross domestic product for the quarter.

An unusually large proportion of the new loans -- 1.48 trillion yuan, or about a third -- was in the form of short-term bill financing, usually used for businesses that need working capital quickly. Many analysts say there is evidence companies have been borrowing those short-term funds only to put them back on deposit and earn the interest. Some of the credit also has flowed into the stock and property markets, they say.

The bank regulatory official said the proposed rules are aimed at preventing those kinds of problems, and said the government doesn't intend to impose new administrative limits on the amount of loans banks can make. The guidelines could be a published document or an informal directive delivered orally to bank chiefs.

A move to contain bank lending could spook investors, whose optimism about a possible recovery in China has been driving up Chinese and Asian stock markets. "Take away the flow [of] liquidity in a hurry, and we have to at least ask whether positive sentiment would continue apace or whether this could cause a relative correction," said UBS economist Jonathan Anderson in a note.

Bank lending is almost certain to slow from the first quarter's pace. In the past, Chinese banks have tended to frontload their lending early in the year, to book as much interest income as possible during the calendar year. Analysts expect the same trend this year, so some of the customary pullback by lenders will likely happen in coming months, even if the government doesn't squeeze credit.

A slowdown in lending growth won't necessarily be a major shock to China's economy. If officials can steer more loans to needy borrowers such as small businesses than is currently the case, they may be able to get more economic bang for every buck lent.