New credit drops unexpectedly, raising concerns

New credit flowing into the Chinese economy dropped surprisingly in July, spooking economists and raising concerns that the world's second-largest economy may be stuck in a period of weak demand.

China's new yuan-denominated lending marked its slowest growth since November 2011 to reach 385.2 billion yuan (62.6 billion U.S. dollars) in July, down by 314.5 billion yuan from a year earlier, the People's Bank of China (PBOC, or the central bank) said Wednesday.

The decline in July's new lending was much lower compared with the 1.08 trillion yuan in new loans issued in June.

The total social financing aggregate, a broad measure of liquidity in the economy, fell to 273.1 billion yuan in July, which accounted for less than one-seventh of that in June and about one-third of the same period last year, according to the PBOC.

The social financing data also marked the lowest monthly reading since the depths of the global financial crisis in October 2008.

M2, a broad measure of money supply that covers cash in circulation and all deposits, increased 13.5 percent year on year to 119.42 trillion yuan at the end of July. The growth rate also slowed by 1.2 percentage points from June.

"The social financing figures in July were truly jaw-dropping," said Lu Zhengwei, chief economist of the Industrial Bank. "They were equal to just a tiny piece of normal months in the past."

After releasing the credit data, the PBOC shortly followed with a two-page statement trying to explain the sharp declines in a bid to soothe the market.

The central bank attributed the plunge in July new credit to multiple factors, including the unexpectedly strong financing data in June, flagging demand for loans amid downward pressures on economic growth, drops in deposits, and risk control by banks in the face of rising bad loans.

Non-performing loans have now risen for 11 straight quarters, according to the PBOC statement.

"A further analysis showed the growth of new credit and social financing still remains in the reasonable range," the PBOC noted in the statement, saying the central bank's monetary policy to "keep total volume stable and optimize the structure" remains unchanged.

"We should not cling to just short-term fluctuation in a single month," the PBOC said, forecasting that credit will keep growing steadily in the future as banks have made loans of between 30 billion and 50 billion yuan each day since the beginning of August.

Lu said that as the government increased investment to stabilize the economy, banks were restrained by the tight capital adequacy ratio regulation, rather than by demand.

He urged regulators to speed up the approval of banks' issuance of preference stocks to replenish their capital.

In the statement, the PBOC vowed to create a "stable monetary environment" for economic restructuring and upgrading and to appropriately fine-tune its monetary policy in a timely way.