China's central bank said on Monday that the ultra-low new monthly loan data was largely due to base effects and should not be overinterpreted.
China's new yuan-denominated loans dropped substantially in July to 464 billion yuan (nearly 70 billion U.S. dollars), down 1.01 trillion yuan from a year earlier. The figure was at its lowest level in two years.
Growth in M2, a broad measure of the money supply that covers cash in circulation and all deposits, was at its second slowest since 1996.
The low figures sparked fears of a sharply slowing economy with businesses showing restraint in borrowing and investing.
The central bank statement said that banks lent less in July after a lending binge in the first six months of the year.
In the first six months, Chinese banks issued 7.53 trillion yuan of new loans, an increase of more than 1 trillion yuan on the same period a year earlier. Although lending eased substantially in July, aggregate lending in the first seven months were still high, the central bank said.
It also attributed the low growth of M2 to base effects, as the money supply was unusually high in the second and third quarter last year due to brisk stock market activity.
With the base effect waning, M2 growth is expected to regain steam in August and September, it added.
The central bank hoped the market would look at the new loan data against the backdrop of the "new normal" and the need for "cutting excess industrial capacity" in the Chinese economy.
It is not strange to see monthly data fluctuate, so overinterpreting the data is undesirable, it noted.
The central bank reaffirmed that liquidity remained adequate in the banking sector, and it said it would apply flexibility in implementing prudent monetary policy.
Economic growth held steady at 6.7 percent in the second quarter, the lowest level since the 2009 global financial crisis but still within the government's target range of 6.5-7 percent for 2016.
Amid downward economic pressures, China has resisted the temptation of temporary fixes such as aggressive monetary easing. Instead, it has chosen structural reform as the tool to put the economy on a more sustainable path.
