NEW bank loans unexpectedly fell in May, with credit growth slowing slightly as policymakers sustained efforts to clamp down on off-balance sheet shadow loans to rein in risks in the world’s second-largest economy.

Latest data from the central bank showed banks extended 1.15 trillion yuan (US$179.58 billion) in net new yuan loans in May, less than the 1.2 trillion yuan seen in a recent poll of analysts and below April’s 1.18 trillion yuan. Banks extended a record 13.53 trillion yuan in new loans last year, 7 percent more than the previous record in 2016.

China is in the third year of a regulatory push to reduce risks in the financial system and regulators continue to roll out measures to improve supervision and risk control in the financial sector.

However, there are expectations the central bank could loosen some of its policy settings to ensure the crackdown on risks and resulting hit to credit growth does not hurt the real economy.

Capital Economics expects the People’s Bank of China to raise the interest rate it charges on its reverse repos if the U.S. Federal Reserve raises interest rates as expected this week, in a symbolic response as economic growth and inflation pick up.

“But China’s central bank’s move will be aimed at narrowing the gap between the market and reverse repo rates rather than to tighten monetary conditions. Indeed, officials have not allowed market rates (a better gauge of monetary conditions) to rise since May last year,” Capital Economics said in a note.

“And we think they will loosen policy later in 2018 as slower credit growth feeds through to a softening in activity.”

Banks doled out a record 2.9 trillion yuan in new yuan loans in January, and extended 7.19 trillion yuan in the first five months of the year.

Despite the wider slowdown, the property sector remains a risk with household loans, mostly mortgages, rising to 614.3 billion yuan in May from 528.4 billion yuan in April. That means household loans accounted for 53.4 percent of total new loans in May, versus 44.8 percent in April.

Corporate loans fell to 525.5 billion yuan in May from 572.6 billion yuan a month earlier.

Broad M2 money supply grew 8.3 percent in May from a year ago, missing forecast for an expansion of 8.5 percent and compared with 8.3 percent in April.

Outstanding yuan loans grew 12.6 percent from a year earlier, slower than an expected 12.7-percent rise and compared with a rise of 12.7 percent in April.

Last month, sources said that China will “actively and steadily” deleverage, citing the country’s five-year plan (2016-2020) for the financial sector.

The weighted average lending rate for non-financial firms, a key indicator reflecting corporate funding costs, rose 22 basis points in the first quarter of the year to 5.96 percent, following a rise of 47 basis points in 2017.

China’s total social financing (TSF), a broad measure of credit and liquidity in the economy, dropped sharply to 760.8 billion yuan in May from 1.56 trillion yuan in April, data from the central bank showed Tuesday.

TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings and loans from trust companies.(SD-Agencies)