BEIJING (Reuters) - New bank loans in China likely rebounded in March from a drop the previous month, a Reuters poll showed, as policymakers push the country’s banks to keep lending to struggling smaller companies even if it risks more bad loans.

A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

Chinese banks likely extended 1.2 trillion yuan ($178.78 billion) in net new loans in March, up about 7 percent from the same period a year earlier, a median estimate in a Reuters survey of 20 economists showed.

After a record credit pulse in January into the slowing economy, new lending dropped sharply to 885.8 billion yuan in February, which analysts attributed to seasonal factors and regulators’ concerns about a flare-up in some types of shadow bank financing.

But if the March reading is in line with forecasts, total bank lending in the first three months of the year would reach a record quarterly tally of 5.32 trillion yuan ($792.60 billion), suggesting months of policy loosening by the central bank are starting to bear fruit.

“Regulators’ credit easing measures have significantly supported loan growth in March,” said Ning Zhang, a senior economist at UBS, while noting that loan demand usually picks up due to seasonal factors during the month.

China’s banking and insurance regulator has told big state-owned banks to increase loans to smaller companies by more than 30 percent in 2019, adding that it would also increase its tolerance for non-performing loans at small firms.

The country’s top four banks warned last week that bad loans could rise and interest margins would shrink industry-wide this year.

While monthly readings can be volatile, outstanding yuan loan growth on a year-on-year basis likely held steady at 13.4 percent, the poll showed.

Broad M2 money supply was seen rising 8.2 percent on-year, up from a 8.0 percent gain in February.

China’s biggest lender Industrial and Commercial Bank of China (ICBC),, is planning more than 100 billion yuan of loans to small businesses this year at the behest of Beijing, and has already doled out over half of the amount in the first quarter.

But analysts say it will be months yet before the credit surge translates into stronger economic activity, assuming many companies are using the funds for expansion and not merely refinancing existing debt at lower rates.

TSF, a broad measure of credit and liquidity in the economy, was estimated to have swelled to 1.744 trillion yuan in March, more than double the 703 billion yuan in the previous month, buoyed by an acceleration in local government special bond issuance as Beijing looks to ramp up infrastructure investment.

TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales.

MORE EASING ON THE WAY

Signs are growing that a flurry of support measures are starting to gain traction, after China’s economic growth slowed last year to a 28-year low.

Activity in the vast manufacturing sector unexpectedly returned to growth in March, while the services sector accelerated, business surveys showed.

But given the lag time between credit growth and actual business expansion, analysts believe China will need to loosen policy further in coming months to ensure a sustained economic turnaround.

The central bank has already slashed banks’ reserve requirements five times over the past year and more reductions are expected in coming quarters, with analysts tipping the next move by mid-April.

RELUCTANT BORROWERS

To be sure, loan growth in China has looked solid at the start of the year as the central bank keeps its liquidity taps open. But with company earnings slumping to multi-year lows, business confidence remains weak overall.

A vice president of Agriculture Bank Of China said last week that a lack of willingness to expand has limited corporate loan demand.

China’s central bank governor last month pointed out lending rates for small firms were still relatively elevated because of concerns they are higher risks, and said policymakers will push ahead with interest rate reforms to resolve the issue.

Premier Li Keqiang also said recently that China will cut “real interest rate levels” and lower financing costs for companies, though it was not clear which rates he was referring to.

Most analysts do not expect China to cut its benchmark lending rate unless economic conditions deteriorate sharply, which would risk adding to a mountain of debt. But sources have told Reuters the central bank may cut money market rates, which is has already been guiding lower in various ways.