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By Tim Seymour

Even as Beijing works to tighten the money supply, Chinese banks are still lending at a robust pace and feeding inflationary forces.

Last night’s new loan numbers can be considered a preview of tonight’s inflation data — the main event for those watching to see whether the Chinese economy will overheat on a combination of fast growth and high oil prices.

It turns out that Chinese lenders handed out another $104 billion in cash last month, a full 27% more than the amount of lending completed in February.

This came despite higher interest rates and what seems to be a long cycle of higher reserve requirements designed to tie up more money and prevent banks from loaning it out.

Chinese money supply has swelled 16% over the last year and with foreign currency reserves up 7% over the last quarter, the country is clearly drowning in cash.

This was a major scene-setter for tonight’s more widely anticipated inflation data. Quick read is not particularly positive — odds are better now that the People’s Bank of China will be compelled to over-tighten rates.

And since recent moves really have not had time to settle in yet, we could see policy get too aggressive.

Watch yuan funds like CYB as the canaries in the coal mine here.

Source: Chinese Lending Up in March, Watch Yuan Funds as Bellwether to Its Economy