China's First Contraction in Outstanding Loans Since 2005 Feeds Worry About Slower Growth

China's first contraction in outstanding loans since 2005 has crystallized worries about a deepening downturn for the world's second-largest economy.

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BEIJING —

Instead of putting money to work, households and companies are paying down their debt as they take a dimmer view of their prospects, threatening a self-fulfilling cycle of economic underperformance. The longest deflation streak since at least the 1990s is also suppressing demand for borrowing, contributing in July to a 430 billion yuan (S$77 billion) decline in loans to the real economy — the most on record going back to 2002.

"Weaker loan demand tends to be a negative sign for future growth," said Mr Lynn Song, chief Greater China economist at ING Bank. "My biggest concern is the entrenched pessimism, which is the main reason for weak consumer and corporate borrowing appetite."

The credit flow will dictate the economic tempo in coming years. For Beijing, the challenge now is how to lift languishing domestic demand that threatens to hobble growth in the long run, just as trade barriers abroad present a risk for China's export engine.