Chinese banks extended 992.7 billion yuan ($142.82 billion) in new yuan loans in July, down sharply from 1.81 trillion yuan in June and falling short of analysts' expectations, according to data released by the People's Bank of China (PBOC) on Tuesday.

Analysts polled by Reuters had predicted new yuan loans would fall to 1.20 trillion yuan in July. The new loans were lower than 1.06 trillion yuan a year earlier.

Wen Bin, senior economist at Minsheng Bank in Beijing, said banks tend to lend less into the second half after rapid credit expansion in the first half due to policy stimulus.

Household loans, mostly mortgages, fell to 757.8 billion yuan in July from 978.8 billion yuan in June, while corporate loans dipped to 264.5 billion yuan from 927.8 billion yuan.

A stronger-than-expected rebound in activity in the second quarter has reduced the urgency for the PBOC to ease policy further, but it will keep conditions accommodative to support the recovery, sources have told Reuters.

The central bank has already rolled out a raft of easing steps since early February, including cuts in reserve requirements and lending rates and targeted lending support for virus-hit firms.

China dropped its annual growth target this year for the first time since 2002 and pledged more government spending as the COVID-19 pandemic badly hurt the world's second-biggest economy.

Broad M2 money supply in July grew 10.7% from a year earlier, central bank data showed on Tuesday, below estimates of 11.1% forecast in the Reuters poll. It rose 11.1% in June.

Outstanding yuan loans grew 13.0% from a year earlier compared with 13.2% growth in June. Analysts had expected 13.2% growth.

QUICKENING TSF GROWTH

Annual growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy that includes off-balance sheet forms of financing, quickened to 12.9% in July from 12.8% in June.

Analysts watch the annual change in the TSF closely to gauge the underlying support for economic activity, given the volatile new lending figures.

Julian Evans-Pritchard, at Capital Economics, expected a further acceleration in broad credit growth in coming months.

"Admittedly, the deceleration in bank loans suggests that loan quotas are no longer being loosened, which could remain a drag on broad credit growth," Evans-Pritchard said in a note.

"But stronger investment demand on the back of the ongoing economic recovery should prop up issuance of corporate bonds and equity, and government bond issuance will remain rapid for the remainder of the year."

Authorities have been leaning more heavily on fiscal stimulus to weather the downturn, cutting taxes and issuing local government bonds to fund infrastructure projects.

By Judy Hua and Kevin Yao