China's new lending dropped to 492.6 billion yuan (76.97 billion U.S. dollars) in July, the least amount of this year, signaling that the world's second-biggest economy is cooling amid the faltering global recovery.
The country's July new yuan-denominated lending was 141.3 billion yuan less than that of June and was down 25.2 billion yuan compared with the amount loaned in July of 2010, the People's Bank of China (PBOC), the central bank, said Friday in a statement on its website.
By the end of July, the broad money supply (M2), which covers cash in circulation and deposits, rose 14.7 percent year-on-year to 77.29 trillion yuan.
The growth rate, which was down from June's 15.9-percent increase, was well below the government's target ceiling of 16 percent for the year.
The narrow measure of money supply (M1), which covers cash in circulation plus current corporate deposits, climbed 11.6 percent year-on-year to 27.06 trillion yuan.
"The less-than-expected lending showed the country's efforts to soak up liquidity is bearing fruit," said Zhao Qingming, an international financial expert.
China's consumer price index (CPI), a main gauge of inflation, rose 6.5 percent year-on-year in July, the fastest pace in 37 months.
To cap soaring prices, the central bank raised the benchmark interest rates three times this year with the latest one in July.
The PBOC also hiked reserve requirement ratios six times this year, ordering banks to keep a record high of 21.5 percent of their deposits in reserves to rein in excess lending.
The slower growth rate of M2 showed the country's lending pace has been properly controlled, said Li Jianpeng, a macro-economic analyst at the Cinda Securities Co.
Chinese banks issued a record of 9.6 trillion yuan in new loans in 2009 to help the national economy go through the global financial crisis. But the excessive liquidity sparked inflationary pressures in the country.
The drop in the growth rate of July's lending was also because of the global economic slowdown and domestic enterprises' difficulty to secure loans, Zhao said.
The rating agency Standard & Poor's downgraded the U.S. credit rating from AAA to AA+ last Friday due to concerns over the strength of the country's economic recovery.
The eurozone debt crisis has yet to show signs of easing, adding uncertainty to a faltering global economy.
China's policy makers are facing a dilemma amid such uncertainties -- continuing the tightening policies would exacerbate a capital crunch for small and medium-sized companies and lead to a slowdown in economic growth; but a sudden relaxation would fuel inflation and capital bubbles.
Experts believe the dilemma gives the government limited room to raise interest rates and reserve requirement ratios, while open market operations will become the country's major tightening tool during the second half.
"Beijing is in a wait-and-see mode regarding policy stance. It's quite safe to expect no interest rate and reserve ratio hikes in the second half", said Lu Ting, an economist at Bank of America Merrill Lynch.
There will be no turning back for the country's monetary policy in the short term, said Liu Yuhui, a researcher with the Financial Research Center of the Chinese Academy of Social Sciences.
"We need to continue the stability and continuity of the monetary policies," Liu said, adding that the country's monetary stance should not be loosened too early.
Analysts said China's foreign exchange rate policy should play a bigger role in combatting inflationary pressures and adjusting economic structure, as a stronger yuan will help alleviate imported inflation. < The Chinese currency, the renminbi, or yuan, gained a record high of 6.3972 per U.S. dollar on Friday.