By Kevin Yao and Ellen Zhang

BEIJING (Reuters) – China’s bank lending tumbled more than expected in July, hitting the lowest in nearly 15 years, dragged down by tepid credit demand and seasonal factors, raising expectations that the central bank may take further easing steps.

Chinese banks extended 260 billion yuan ($36.28 billion) in new yuan loans in July, down nearly 88% from the previous month and missing analysts’ forecasts, according to data released by the People’s Bank of China on Tuesday.

Analysts polled by Reuters had predicted new yuan loans would be 450 billion yuan last month, noting that July is traditionally a weak period for credit expansion.

After the data, some analysts expected the PBOC to cut interest rates further but cautioned it may need to tread carefully for fear of fueling capital flight and hurting the yuan currency.

“July’s credit data is indeed very weak,” said Zhou Shilei, director of the global financial market department at UOB (China). “The effect of previous interest rate cuts is not significant, and there are expectations for further rate cuts.”

Last month’s new yuan loans dipped from June’s 2.13 trillion yuan and compared with 345.9 billion yuan a year earlier.

Banks extended 13.53 trillion yuan in new yuan loans in the first seven months of this year, according to the PBOC.

The central bank did not provide a single-month breakdown for July, but Reuters calculated the figure based on the bank’s January-July data, compared with January-June.

Household loans, mostly mortgages, contracted 210 billion yuan in July, down from a rise of 570.9 billion yuan in June, based on Reuters calculations derived from PBOC data. Corporate loans also dropped to 130 billion yuan from 1.63 trillion yuan in June.

The PBOC’s survey of bankers published last week suggested loan demand weakened significantly in the second quarter, with the overall loan demand index falling to 55.1% from 71.5% in the previous quarter.

Central bank chief Pan Gongsheng stated that a slowdown in China’s credit expansion is natural due to economic shifts, less lending to the property sector, and local government financing vehicles.

China’s economic growth missed forecasts in the second quarter, and July’s economic indicators continued to disappoint as export growth slowed and consumer inflation only rose due to weather disruptions to food supplies.

MORE RATE CUTS EXPECTED

The PBOC pledged to guide credit to grow reasonably and steadily lower companies’ financing and household credit costs, as stated in its second-quarter monetary policy implementation report published last week.

At a meeting earlier this month to discuss policies for the second half of 2024, the PBOC said it would step up financial support to the broader economy, directing efforts more at consumers to spur consumption.

To bolster growth, the PBOC unexpectedly conducted a medium-term lending facility operation on July 25 and cut the interest rate, while five of China’s major state-owned banks cut deposit rates the same day to cushion a hit to their record low margins.

“With private credit demand still lackluster, the recent rate cuts aren’t significant enough to drive much of a recovery,” Capital Economics noted. They expect only a further 20bps cut to the loan prime rate this year, which they believe won’t be sufficient to drive a sustained resurgence in credit demand.

Outstanding yuan loan growth slowed to 8.7% from a year earlier, compared with 8.8% in June, against analysts’ expectations of an 8.8% gain.

Some signs showed steadying in key money gauges. Last month, broad M2 money supply rose 6.3% versus a year earlier, beating the 6.1% forecast in a Reuters poll and a record low of 6.2% in June. Annual growth of outstanding total social financing, a broad measure of credit and liquidity in the economy, speeded up to 8.2% from 8.1% in June.

In July, total social financing fell to 770 billion yuan, compared with forecasts of 1.1 trillion yuan and 3.3 trillion yuan in June.

($1 = 7.1656 Chinese yuan renminbi)