China's growth is expected to have re-accelerated to near 8 percent in the fourth quarter of last year, but there are some troubling inconsistencies in the economy, according to the China Beige Book released on Wednesday.
The latest survey by the U.S. based China Beige Book (CBB) International has found "shocking" evidence of falling loan demand in the world's second-largest economy.
"In the fourth quarter, we're seeing corporate loans decline significantly, very shockingly most of our bankers say less than 20 percent of their lending goes to new loans. Most of its going to debt rollovers or increases, they are not funding expansion. That indicates that this is not a period of strong expansion," Leland Miller, president at CBB told CNBC on Wednesday.
The quarterly private sector survey that resembles the U.S. Federal Reserve's Beige Book is based on interviews with over 2,000 respondents, made up of business executives across sectors and regions in the mainland. The report, launched in 2011, uses methodology adapted from the Fed's Beige Book, according to CBB.
Despite easing credit conditions - the People's Bank of China cut interest rates and the reserve requirement ratio (RRR) for banks twice each in 2012 - just 32 percent of companies surveyed borrowed money, falling from 34 percent in the third quarter, and below first-half figures, the report showed. Loan demand is used as a barometer for business confidence.
"Bankers are cautious, cutting exposure to firms with over-capacity and ties to the government and holding lending to state-controlled as well as large firms," he added.
Miller said the country's manufacturing and mining sectors, which have seen acceleration in inventory growth, are also a cause of worry.
In recent months, HSBC's China manufacturing Purchasing Managers Index (PMI) has pointed to growth revival in the sector, touching a 19-month high in December.
"We are seeing significant inventories building up across the country. This calls into question just how sustainable this expansion is," he said.
The single biggest concern regarding the two sectors is whether there is enough demand to meet the supply, Miller said, which will become more evident over the course of 2013.
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"If you're building up too much inventory, then the loans you took out to fund production become non-performing loans. Underlying demand is pivotal," he added.
On the bright side, however, there is evidence of increasing strength in retail – which CBB identified as the "strongest sector" in China at the moment – a reflection of the country's re-balancing away from an export-driven to consumption-focused economy.
Sixty-one percent of retail businesses saw a rise in revenue growth in the fourth quarter, up 3 percent compared to the third quarter, which had seen a decline of 10 percent.
The pickup in revenue growth was notable in luxury and durable goods—furniture, appliances, and autos, the report said.
"To have a healthier Chinese economy you want to see manufacturing's share of the economy decline over time, and you want to see sectors like services, retail become more important. One of the conclusions we had in 2012 was this is happening," he said.