Wen says economy better than expected, sees positive signs

* March industrial output up 8.3 pct yr/yr, Wen says

* Domestic demand in March shows “stable growth”

* New yuan loans hit record 1.89 trln in March

* Foreign reserves see smallest quarterly rise since Q2 2001

By John Ruwitch and Jason Subler

PATTAYA, Thailand/BEIJING, April 11 (Reuters) – China’s economy is in a better shape than expected with March industrial output growth exceeding forecasts, but it still faces big challenges, Premier Wen Jiabao said on Saturday.

Wen, speaking on the day when the central bank reported a record rise in new lending last month, said industrial output growth picked up to 8.3 percent in March from a record low of 3.8 percent in the first two months of the year.

Analysts polled by Reuters had expected a 6 percent rise in industrial production, due for official release on April 16 along with first quarter economic growth figures and other data. [ID:nPEK325406]

“China’s economy has shown some positive signs, but we can all see that our economy still faces some very big difficulties,” Wen told reporters in the Thai seaside resort of Pattaya, where East Asian leaders were holding a summit.

He said China’s policymakers have taken appropriate action to help the world’s third largest economy to weather what has turned into the worst global crisis since the 1930s Great Depression.

“Chinese government policy has been timely, correct and decisive,” Wen said.

In the latest sign that the government’s efforts to revive the economy were beginning to bear fruit, new loans and money supply growth surged to record highs in March. [ID:nPEK337716]

LENDING BOOM

Banks extended 1.89 trillion yuan ($276.6 billion) in local currency-denominated loans in March, bringing the total for the first quarter to 4.58 trillion yuan — nearing the government’s full-year target of at least 5 trillion yuan.

Analysts saw the lending figures as a sign that Beijing’s moves to boost domestic demand were working, but they also cautioned against jumping to the conclusion that a rebound was just round the corner.

“The March lending is strong, but whether the strong growth in bank credit can revive the real economy sector is still unclear,” said Zhang Xiaojing, an economist with the Chinese Academy of Social Sciences in Beijing.

One of the main concerns about the surge in lending has been that it could be financing stock market speculation as much as actual investment and spending.

But Wen said March domestic demand, including fixed asset investment and consumption, had shown “stable growth” compared to the year before and January and February.

China’s economic situation was “better than expected”, he said, according to a recording of the remarks.

The Chinese premier was scheduled to meet with Southeast Asian leaders earlier on Saturday for a summit to sign a joint investment agreement, but Thai anti-government protesters blockading his hotel forced a delay in that meeting.

China, the only economy among the world’s top five that is still growing, was hit hard by a plunge in exports and Beijing has been trying to soften the blow by boosting investment and spending at home with a 4 trillion yuan ($585 billion) stimulus.

Wen noted the collapse of demand for Chinese exports among the biggest difficulties the economy faced.

Dwindling trade volumes and a decline in foreign investment were reflected in the smallest quarterly rise in China’s foreign exchange reserves. The world’s largest stockpile rose just $7.7 billion to $1.9537 trillion in the past quarter, according to central bank data released on Saturday.

Data on Friday showed China’s exports and imports fell for the fifth month in a row in March, but the 17 percent annual decline in exports was much less severe than feared, raising hopes that trade may start bottoming out. [ID:nPEK8623] China’s urban fixed-asset investment grew 26.5 percent in January and February from a year earlier, supported by the surge in government spending. (Writing by Tomasz Janowski; Editing by Sugita Katyal)