Economists said new credit in July is expected to pick up but they're divided on future interest rate increases.

New credit in July is expected to rise to 650 billion yuan (US$97 billion), Lu Zhengwei, an Industrial Bank economist, said. Media reports suggested the figure could be around 700 billion yuan.

Banks in China extended 603.4 billion yuan of new yuan loans in June, down from May's 639.4 billion. The official July data will be released around August 11.

"Some economic indicators are showing that China's growth is slowing down with a weak external demand," said Lu.

"Against the backdrop, we think it's unlikely to see any interest rate rise this year."

China's manufacturing sector contracted last month for the first time since May last year, an HSBC survey showed on Monday.

The HSBC China Manufacturing Purchasing Managers' Index, a comprehensive indicator of industrial activity, softened to 49.4 in July from 50.4 in June, dropping below 50, the mark of expansion and contraction.

Market speculation mounted earlier this year that China may raise interest rates in the second half to cool off the economy.

Now, with indicators showing possible slowdown, economists like Lu are hosing down such expectations. But some said further tightening is still needed.

Sebastien Barbe, a Credit Agricole economist, said interest rate rises are likely in the third quarter, especially if inflation speeds up.

China's inflation grew 2.6 percent in the first half. China aims to contain inflation for the whole of this year within 3 percent.

China has kept its interest rates untouched since 2009. The one-year benchmark deposit rate is 2.25 percent. The one-year lending rate is 5.31 percent.

China has targeted a money supply growth of 17 percent this year with whole-year new credit of 7.5 trillion yuan.

China will keep its loose monetary policy in the second half except for controls on areas such as high-polluting industries and real estate.

Banks in China issued a record 9.6 trillion yuan of new credit in 2009 amid a stimulus package against the global financial crisis.