* New lending tops 1 trln yuan, first time since Jan 2011
* Money supply growth of 13.4 pct beats forecasts of 12.9 pct
* Foreign exchange reserves swell to $3.3 trillion in Q1
By Koh Gui Qing
BEIJING, April 12 (Reuters) - China's bank lending trumped forecasts to spike to 1.01 trillion yuan ($160 billion) in March, a sign of fresh traction in Beijing's bid to boost credit creation to support the cooling economy.
The surge in lending was the biggest monthly extension of credit since January 2011, when new loans last topped 1 trillion yuan, holding out hope that China's economy will not only avoid a hard landing but pick up speed again later this year.
Economists said Thursday's data, which also showed stronger-than-expected growth in money supply, reinforced bets that an interest rate cut is unlikely since Beijing can ease monetary policy by just loosening credit controls.
"The new loans number is very strong. It signals that loan demand has rebounded and shows that the economy is turning," said Zhang Zhiwei, an economist at Nomura in Hong Kong.
"This is another signal that reinforces our view that the first quarter is the bottom of the cycle and that momentum is picking up."
China is set to release its first-quarter growth report on Friday at 0200 GMT, and analysts expect the slowest economic expansion since the tail-end of the 2008/09 global financial crisis.
Analysts polled by Reuters expected first-quarter growth of 8.3 percent from the same period a year earlier. On a quarterly basis, growth is expected to slow to 1.6 percent from 2.0 percent in the fourth quarter last year.
But things may be looking up judging by Thursday's data.
M2 money supply rose to a three-month high of 13.4 percent in March from a year earlier, ahead of forecasts for 12.9 percent growth and following February's 13 percent expansion.
Economists had expected banks to make 800 billion yuan worth of new loans in March. Outstanding yuan loans at the end of March were 57.25 trillion yuan, an increase of 15.7 percent from a year earlier.
Bank lending is a centrepiece in China's monetary policy and is controlled by Beijing, which tells banks exactly how much to lend.
Sources say Beijing gave banks the go-ahead to lend 8 trillion yuan this year, up from a 2011 target of between 7-7.5 trillion yuan, as it loosens policy to boost economic growth. These loan targets are not announced publicly.
The burst in bank lending in March lifted overall lending in the first quarter to 2.459 trillion yuan, ahead of a quarterly target for 2.4 trillion yuan, and above the 2.2 trillion yuan seen in the same period last year.
As part of Beijing's credit supervision, it tells banks to pace themselves by lending about a third of loans each in the first and second quarters, and a fifth of loans each in the final two quarters of the year.
China's foreign exchange reserves, the world's largest, rose by around $124 billion in the first quarter to $3.305 trillion at end-March, reversing a rare decline of $20.6 billion in the fourth quarter.
Ting Lu, an economist at Merrill Lynch-Bank of America, said growing reserves indicated capital was returning to China after fleeing in the second-half of 2011 when Europe's raging debt crisis drove nervous investors out of emerging markets.
"The worst is over," Lu said in a note to clients. "Today's data means that the chance of a rate cut is very small in the near future."
He said he expects China to further reduce the level of cash that banks must hold as reserves by 100 basis points to 19.5 percent this year, putting the economy on track to grow 8.6 percent in 2012.
But not all economists are confident the Chinese growth engine will accelerate from April. Some say patchy economic data in recent months and sluggish global demand suggest activity could slacken further in the second quarter before recovering from July.
The World Bank, for instance, cut its forecast for China's 2012 economic growth to 8.2 percent on Thursday, from 8.4 percent.
It said a rebound might not begin before the third quarter of the year as listless foreign demand and a government-induced real estate slowdown restrain a recovery.
Some analysts also wondered about the quality of some of the new loans being written, as Chinese banks have been seen to be increasingly exposed to sour loans and local government debt as the property market and broader economy slows.
Economists and financial analysts estimate as much as 2-3 trillion yuan of loans made to local governments have gone bad and that the scale of the problem may push up non-performing loan ratios in the banking industry to around 5 percent from their current average of 1.1 percent. Banks are now under pressure to rollover some of those loans.
But in a sign Beijing is mindful that an overly-lethargic housing market and overly-restrictive monetary conditions could create even more headwinds for China's economy, it is starting to unwind some of its strident policy tightening.
State media said on Thursday Chinese banks are giving first-home buyers discounts on mortgage interest rates of between 10 to 15 percent.
Small Chinese private firms which are always short on credit are also getting more funding support from the government.
Beijing is said to be finalising rules allowing small- and medium-sized firms to sell bonds, whilst encouraging private investors to plough their cash into the financial sector as a way of giving companies more access to loans.
"Policy support is very clear," said Tao Wang, an analyst at UBS. "Even though the corporate sector may not have very strong demand, the government will be less strict with credit to local governments and developers."