New yuan-denominated loans in July fell far short of market expectations, prompting calls from analysts [Hong Kong company registration]for China to adopt a more flexible monetary policy as economic weakness persists into the second half of the year.

The People's Bank of China announced on Wednesday that new local-currency loans totaled 385.2 billion yuan ($62.6 billion) last month, much weaker than the widely expected figure of more than 700 billion yuan.

Total social financing, a broad measure of overall credit supply, dropped 546 billion yuan from the previous year to 273.1 billion yuan, while M2 money supply, the broadest measure of money supply, expanded 13.5 percent year-on-year, a decline of 1 percentage point from a year earlier.

Lian Ping, chief economist of Bank of Communications Co Ltd, said the weak credit growth was "highly unusual" as new loans have generally exceeded 500 billion yuan a month in recent years.

Lian said that two major factors are depressing credit growth.

First, even the companies that are experiencing favorable operating conditions have little incentive to invest in the medium and long term because China is facing "relatively high pressure" [Offshore Company Incorporation]from an economic downturn.

Second, companies that desperately need funds find that banks are extremely reluctant to lend because of concerns over bad loans.

Seasonal factors also contributed to the contraction of loan growth. The China Banking Regulatory Commission assessed banks' first-half financial performance at the end of June. Ahead of that assessment, new yuan loans grew by a record amount in June, then fell back in July.

Researchers said further observations are needed before jumping to a conclusion about the economic trajectory.

Lian said that the economy will stabilize this month, partly because seasonal factors will dissipate.

The PBOC said in a statement on its website: "Disregarding the influence of the base effect and seasonal factors on the economy, major financial indicators remained in a reasonable range in July.

"People should focus more on the overall trend of leading indicators, rather than short-term data fluctuations in a single month."

New yuan loans ran at 30 billion yuan to 50 billion yuan a day in the first 10 days of August, [Hong Kong Company Formation|Hong Kong Company Registration]the PBOC said. It forecast that money supply, credit and aggregate financing will show stable growth.