New lending and social financing in China continued to shrink in July as credit demand remained weak amid economic uncertainties and curbs of over rapid credit expansion by the authorities.

According to data released by the People's Bank of China on Friday, Chinese lenders extended new loans of 699.9 billion yuan ($114.3 billion) in July, down by 160.6 billion yuan from June's 860.5 billion yuan.

Yuan-denominated deposits among banks dropped by 257.3 billion yuan in July. [ Xie Zhengyi / for China Daily]

Total social financing also dropped to 808.8 billion yuan, from June's 1.04 trillion yuan, marking the fourth straight month of decline and a 21-month low.

"For most commercial lenders, credit demand from the real economy was still weak in July. A big drop in deposits also hindered banks from lending out more. In addition, because of lower expectations on foreign exchange purchases, which affects market liquidity, the banking industry is still facing big capital pressure," said Ni Jun, a banking analyst at Shenyin & Wanguo Securities.

In July, yuan-denominated deposits among banks dropped by 257.3 billion yuan.

Growth of China's manufacturing sector slowed to an 11-month low during the same period. The HSBC Purchasing Managers' Index dropped to 47.7 in July, down from 48.2 in June.

M2, a broad measure of money supply, however, increased by 14.5 percent year-on-year by the end of July, 0.5 of a percentage point higher than one month earlier.

From January to July, total social financing stood at 10.96 trillion yuan, up by 2.13 trillion yuan from the same period last year.

"The growth of monetary aggregates slowed in July, reflecting the effects of a firmer monetary stance, especially toward shadow banking," said Louis Kuijs, chief China economist at the Royal Bank of Scotland Group.

The Chinese government has been tightening the reins on over-rapid credit expansion, especially when related to shadow banking activities and trade-related arbitrage, in recent months to fend off systemic risks while the economy continues to lose steam.

Friday's release was the first set of monetary statistics following June's cash crunch in the interbank market.

The amount of new yuan loans pleasantly surprised the market, said ANZ Group in a research note.

"Notably, new yuan loans accounted for about 90 percent of total social financing in July, much higher than the 50 percent in the first half, suggesting off-balance-sheet financing activities have been dampened," it added.

But the level of total financing fell short of expectations, driven by the decline in foreign currency loans. They fell by 115.7 billion yuan in July, the note said.

"The drop reflects onshore banks cut their foreign position or trade-related (arbitrage) activities in July. Corporates that look for foreign currency loans may have been pushed to the offshore markets. The situation will not be relieved until onshore banks have recovered their foreign currency positions."

E Yongjian, a senior analyst at Bank of Communications, said given tighter monetary liquidity, the reverse repurchases of central banks might become more frequent in the coming months to stabilize market interest rates.