"This is major shift in government policy, a breakthrough,"said Zhou Shengye, a professor in the financial department at the People's University.

Beijing had kept tight reins on consumer lending for the fear of non-repayment and triggering a surge of inflation, but it had allowed state banks to make mortgage loans and lend to car buyers.

Last year the benchmark retail price index actually fell 2.6 per cent and that was a factor in the policy shift as the government had to worry much less about inflation, the analysts said.

On Wednesday, the official Xinhua news agency quoted a central bank document as saying all domestic banks were now permitted to make consumer loans to fuel economic growth.

The central People's Bank of China instructed commercial banks to extend more credit to home buyers and people purchasing cars this year, the agency said.

The central bank also encouraged banks to open new businesses, including financing purchases of durable goods and loans for education and tourism, it said.

Down payments on houses and automobiles could now be cut to as little as 20 per cent of the total cost, Xinhua said, without giving the current minimum.

Despite Beijing's massive pump-priming measures last year, consumer spending remained weak on the back of slowing incomes and rising expenses on housing and medical care as Beijing moved to cut welfare benefits.

China's economy grew an annual 7.8 per cent last year, powered by huge state investment in infrastructure projects.

China is targetting 7 per cent growth this year and will spend its way to a record budget deficit to achieve the goal, premier Zhu Rongji will tell parliament this week.

In a speech to be delivered to the National People's Congress on Friday, Zhu points to more huge outlays this year on telecommunications, highways and waterworks to keep up economic growth despite the Asian financial crisis.

His speech, parts of which were seen by Reuters on Wednesday, offers little hope that China's other main engines of growth--consumption, exports and foreign investment--will kick back into life.

"The external economic environment we face this year remains extremely serious," he says. "It will be difficult to see a relatively big increase in domestic consumption demand for a period of time."

"The consumer loans will have some impact on consumption, but we cannot expect a big change in the near future" Zhu said.

Housing prices were beyond the means of ordinary people and most would seek bank loans for buying durable goods such as home electric appliances, he said.

An analyst at the Bank of China said there were risks for banks in consumer credit because most of them lacked expertise in the business.

"The biggest problem for banks is still lending risk," he said.