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August 12, 2011 7:00 AM EDT
China's bank lending slowed more than expected in July to seven-month lows as Beijing kept a tight grip on monetary policy to quell near three-year-high inflation.
Money supply growth sank to six-year lows, but analysts predicted that tight monetary conditions may not hold in coming months as mounting risks of a global economic slowdown may prompt Beijing to loosen credit conditions.
The central bank could gently ease policy by keeping interbank rates low, or by encouraging banks to lend more to smaller-sized firms.
"July's loan (data) is too low to be sustainable," said Xu Biao, an economist with China Merchants Bank in Shenzhen. "Without a doubt, some kind of an easing in bank credit will take place in coming months."
Chinese banks made 492.6 billion yuan ($77 billion) of loans in July, the People's Bank of China said on its website, a pull-back from 634 billion yuan lent in June.
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Economists had forecast lending of 550 billion yuan.
Bank lending is a focal point in China's monetary policy as it is controlled by Beijing through loan quotas to manage economic growth and control price pressures.
To quell inflation before it stirs social discord, China's central bank has been steadily tightening policy since October, when it kicked off the first of five interest rates rises.
However, worsening debt problems in the United States and Europe, China's two biggest export markets, have led Beijing to signal it is ready to pause its tightening campaign.
"It seems they are preparing the ground for something called directed easing," said Stephen Green, an analyst at Standard Chartered Bank in Hong Kong. "The ambition is more credit for small- and medium-sized enterprises."
Underlining the tightness in the banking system, China's broad M2 measure of money supply grew only 14.7 percent in July, the weakest pace of growth seen since April 2005, and again missing forecasts for a 15.8 percent growth.
Yuan loans outstanding at the end of July were 16.6 percent higher than a year earlier, roughly in line with forecasts for a 16.8 percent expansion.
And in a sign that banks may have artificially inflated their deposit bases in June to meet quarterly regulatory checks, data showed savers withdrew 669 billion yuan in deposits in July.
That comes after new yuan deposits ballooned to 1.91 trillion yuan in June, when banks had competed to attract deposits to meet a 75 percent loan-to-deposit ratio requirement.
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