FILE PHOTO: A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration/File Photo

By Kevin Yao and Ethan Wang

BEIJING (Reuters) - China's new bank loans recovered in August but were much lower than expected after unexpectedly contracting in July, as a protracted property slump and the government's campaign to rein in industrial overcapacity weighed on credit demand.

Chinese banks extended 590 billion yuan ($82.84 billion) in new loans in August, bouncing back from a 50 billion yuan contraction in July - the first decline in 20 years, according to Reuters calculations based on data from the People's Bank of China (PBOC) on Friday.

Analysts polled by Reuters had expected August new yuan loans would reach 800 billion yuan, compared with 900 billion yuan a year earlier.

Outstanding yuan loans rose 6.8% in August from a year earlier, a record low, and down 6.9% in July. Analysts had expected growth to stay at 6.9%.

"Weak private credit demand drove a further weakening of bank loan growth in August. And growth in government bond issuance slowed for the first time this year, resulting in a slowdown in broad credit growth," Capital Economics said in a note.

"Credit growth is likely to weaken further over the coming months."

The central bank does not provide monthly breakdowns. Reuters calculated the August figures based on the bank's January-August data, compared with the January-July figure.

Banks extended 13.46 trillion yuan in new loans in January-August, down 6.7% from 14.43 trillion yuan in the same period last year, highlighting tepid demand.

Household loans rose to 30.3 billion yuan in August, reversing a contraction of 489.3 billion yuan in July, according to Reuters calculations. Corporate loans rose to 590 billion yuan last month from 60 billion yuan in July.

As the U.S. Federal Reserve gears up for an expected rate cut next week, the PBOC is likely to resist a near-term easing in policy as it grapples with a dilemma: how to shore up a weak economy without further fuelling a hot stock market.

Top Chinese banks last month warned net interest margins would face increased pressure for the rest of the year, as the sector was weighed down by successive central bank interest rate cuts and weak loan demand.

Banks also face government pressure to offer cheaper loans or easier repayment terms to help struggling businesses, further compressing profit margins.

China's economy had lost some momentum coming into the third quarter, with factory output growth slumping to an eight-month low and retail sales also decelerating sharply in July.

Manufacturing activity fell for a fifth straight month in August, while exports also slowed to a six-month low last month as a brief boost from a tariff truce with the U.S. faded.

Beijing and Washington agreed last month to extend the truce for another 90 days, staving off even higher duties as both sides continued to search for a comprehensive deal.

At home, the government has launched a so-called "anti-involution" programme to curb overcapacity and cut-throat competition among firms, as expectations grow for a new round of factory capacity cuts in a long-awaited but challenging campaign against deflation.

To boost domestic consumption, Beijing last month announced interest subsidies on loans to households and businesses in a bid to lower borrowing costs and spur spending.

The subsidies, which only took effect from September, could have delayed some borrowing decisions, Citi economists said in a research note.

Broad M2 money supply grew 8.8% from a year earlier, the central bank data showed, above analysts' forecast of 8.7% in a Reuters poll. M2 expanded 8.8% in July.

The narrower M1 money supply climbed 6.0% year-on-year, compared with 5.6% in July.

Outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, rose 8.8% year-on-year, slowing from July's 9.0% pace, which was the highest since February 2024.

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

($1 = 7.1224 Chinese yuan renminbi)

(Reporting by Kevin Yao and Ethan Wang; Editing by Kim Coghill)