Chinese banks wrote 587 billion yuan ($92.5 billion) of new loans in October, much more than expected and a sharp jump from September, evidence of selective policy easing by the government to keep the world's second-largest economy on an even keel.

But annual growth in China's broad M2 measure of money supply eased to 12.9 percent from 13.0 percent in September, suggesting monetary conditions remained relatively tight.

The median forecast by economists was for 500 billion yuan in new loans in October, up from 470 billion yuan in September, and a 13.0 percent rise in M2.

New yuan lending is more than expected, showing that policy is being relaxed, Sun Wencun, an economist at CITIC Securities in Beijing.

This trend will continue for the rest of this year and banks will probably extend about 1.3 trillion yuan of new loans in the final two months. However, a cut in banks' required reserves is unlikely this year, he said.

Chinese banks extended a total of 6.3 trillion yuan in new local currency loans in the first 10 months of 2011, still far below the estimated annual credit quota of 7.5 trillion yuan set at the beginning of this year.

The central bank has never announced the quota.

Household deposits at Chinese banks fell a net 727.7 billion yuan in October, reflecting a savings flight to higher-yielding wealth management products and even underground lending markets that the government has been trying to contain.

This sharp fall in deposits could limit banks' ability to lend as the regulator is enforcing a 75 percent loan-to-deposit ratio requirement, analysts say.

Other data this week showed China's export engine is feeling the pinch of the global economic slowdown even as consumer spending and investment in roads and other infrastructure remains resilient.

China's annual inflation fell to 5.5 percent in October from September's 6.1 percent, pulling back further from a three-year high of 6.5 percent in July, but it remained above the government's full-year target of 4 percent.

FINE-TUNING

Chinese leaders have begun talking in recent weeks about fine-tuning policy to underpin economic growth, which slowed in the third quarter to 9.1 percent, its weakest in more than two years.

As inflation worries ease and global macro uncertainties rise, the room for fine-tuning of monetary tightening is getting bigger and policies could be increasingly nudged toward pro-growth, Ting Lug, China economist at Bank of America/Merrill Lynch in Hong Kong.

Some policy easing is already under way, with commercial banks gearing up to unleash more credit to cash-starved small businesses, which have also been supported by tax cuts.

Small firms, which account for 75 percent of urban jobs in China, have borne the brunt of credit curbs as banks have preferred lending to big, state-backed enterprises, forcing them to turn to high-interest informal loan markets.

The People's Bank of China has also been pumping more cash into the banking system via its regular open market operations, injecting a net 163 billion yuan in the past two weeks.

Chinese industrial output grew at its weakest annual pace in a year in October while inflation fell sharply, raising expectations that Beijing will do more to support economic growth by tweaking policy.

Many analysts still believe the central bank could cut banks' reserve requirements as economic activity falters, but few expect the central bank will rush to cut policy rates.

Monthly new loans in November and December will be about 600-650 billion yuan, but we don't think the central bank would cut interest rates, said E Yongjian, an economist at Bank of Communications in Shanghai.

($1 = 6.346 Chinese Yuan)

(Additional reporting by Koh Gui Qing; Editing by Ken Wills & Kim Coghill)

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