China's sharp credit growth slowdown in July may signal rising default risks in some parts of the economy, analysts said.
"The phase of unchecked shadow banking growth is over, while the housing downturn is not," Wei Yao, an economist at Societe Generale, said in a note Wednesday.
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China's debt levels – which soared to 250 percent of gross domestic product (GDP) according to some estimates – have been a major concern for years, spurring fears that the borrowing surge is fueling a dangerous property bubble and overcapacity in many industries, including steel, mining and solar energy, any of which could face collapse as the economy slows and Beijing tries to choke off overinvestment.
In July, the total social financing (TSF) aggregate fell to 273.1 billion yuan ($44.34 billion), indicating the amount of money flowing into China's economy slowed to the lowest monthly reading since the October 2008 depths of the global financial crisis.
Some are concerned about the decline in new shadow banking, particularly for the trust funds.
"The trust fund industry is the single largest funding provider behind the wave of leveraging up among the local governments and property developers over the recent years," Dong Tao, an economist at Credit Suisse, said in a note Wednesday.
Tao cited data from the China Trust Industry Association which showed the trust industry's assets under management hit a record high of 12.48 trillion yuan in the second quarter, but asset growth was only 6.4 percent from the previous quarter, the slowest since data became available.
"The decline in capital influx for trust funds will likely have direct implications on funding for infrastructure and property projects," Tao said. "It also threatens the ability of debt repayment of these players when the debt matures."
With many maturities set for the end of this year and the first half of 2015, "that is likely to be the window time for default waves that potentially could cause chain reaction and threaten the financial stability in the economy," he said.
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Others aren't certain that the government will permit a debt-default shakeout.
"The medium-term direction of a more reform-oriented, market-oriented approach to the financial sector -- medium-term wise, the government will move in that direction," Louis Kuijs, an economist at RBS, said in a phone interview. "What I don't know and what I wonder is how forceful they will be in the short-term in pursing it."
He doesn't believe Beijing's risk-appetite for allowing defaults is particularly high currently. "In the short-term, they may not want to take the risk of allowing some of these credit events to happen."
But even without defaults, there are concerns that this week's economic data could signal wobbles on the mainland
Societe Generale's Yao noted that property sales in July were "simply miserable," dropping 16.3 percent on-year, to the lowest since 2008 in volume terms. Property is estimated to account for around 20 percent of the mainland's GDP.
"This was very unsettling, given that many local governments relaxed home purchase restrictions in recent months," she said, adding she'll be watching the August and September property sales data closely.
"If there would still be no stabilization in housing sales, we would be worried about a sharper slowdown of the overall economy," she said.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1