(Yicai Global) June 14 -- An adviser to People's Bank of China attributes a sharp drop in social financing in May to the central bank's efforts to expand deleveraging in the world's second-biggest economy.

There were decreases in entrusted loans, trust loans and undiscounted bank acceptance bills, the three major components of shadow banking, in May, is the main contributor to the steep fall in social financing, PBOC Adviser Sheng Songcheng told Yicai Global.

Social financing fell dramatically to CNY760.8 billion in May from CNY1.6 trillion in April despite an 8.3 percent annual increase M2 broad money supply, PBOC data shows.

"Financial deleveraging has led to credit tightening," Sheng said. "It was initially only found in the financial market, but now it has been channeled to the real economy, which is reflected in the sharp decline in social financing, though monetary policy should not be loosened."

Changing China's monetary policy would constitute a waste of deleveraging efforts, he added.

Entrusted loans, trust loans and undiscounted bank acceptance bills respectively contributed 0.8 percent, 1.4 percent and 0.8 percent of social financing in January to May last year, compared with -0.9 percent, 0 percent and 0.1 percent during the same period this year, according to Sheng's latest estimates.

Financial deleveraging will not be reversed, Sheng said. However, the central bank will be more likely to implement prudent and neutral monetary policy rather than prudent and relatively tight monetary policy as before and use quantity as well as quality-focused instruments such as targeted reserve requirement ratio cuts and medium-term lending facilities to adjust money supply, he added.

"Of course, the marginal strength of deleveraging will gradually decline, while annual M2 growth will likely be higher this year than last," Sheng said.

Editor: William Clegg