China's new yuan-denominated loans in September hit the lowest in 20 months and the money supply grew at the slowest pace in almost a decade, as the government strives to reduce liquidity to combat inflation.

New yuan-denominated loans stood at 470 billion yuan (73.7 billion U.S. dollars) in September, the People's Bank of China (PBOC), or the central bank, said in a statement on its website on Friday.

The amount represented a drop of 131.1 billion yuan from the same month last year and 78.5 billion yuan from August this year, creating the lowest since January 2010.

Total new loans in the first nine months of this year was 5.68 trillion yuan, 597.7 billion yuan less than the same period last year, according to the statement.

By the end of September, the outstanding broad money supply (M2), which covers cash in circulation and all deposits, rose 13 percent year-on-year to 78.74 trillion yuan, the statement said.

The growth rate was 0.5 percentage points lower than that by August this year and 6.7 percentage points lower than that at the end of last year, the slowest since March 2002.

The narrow measure of money supply (M1), which covers cash in circulation plus demand deposits, increased 8.9 percent year-on-year to 26.72 trillion yuan by the end of last month, the statement said. The growth rate was the lowest since February 2009.

"Although new yuan-denominated loans in September dropped beyond previous expectations, new loans are still sufficient to meet the demand of China's economic growth," said Zhuang Jian, a senior economist with the Asian Development Bank.

Yang Ruilong, an economics professor at Renmin University, said the drop in new loans should be attributed to government efforts to tighten its monetary policy.

The central bank has raised interest rates three times this year and hiked the reserve requirement ratio for commercial banks six times to mop up excessive liquidity to ease inflation.

China's consumer price index (CPI), a main gauge of inflation, climbed 6.1 percent year-on-year in September, easing slightly from 6.2 percent in August, the National Bureau of Statistics said.

On a monthly basis, consumer prices rose 0.5 percent last month. The Chinese government's full-year inflation target was around 4 percent for 2011.

"Controlling runaway prices can only be effective when the growth in money supply slows down," Yang said.

The central bank also said in the statement that China's foreign exchange reserves totaled 3.2017 trillion U.S. dollars at the end of September, compared with 3.1975 trillion U.S. dollars at the end of June.

Yang said that affected by the debt crisis in European and American countries, China's exports are facing increasingly great pressures, the trade surplus is narrowing, and the inflow of foreign capital is also dropping.

Even though China's new loans and money supply dropped, experts are warning that it is too soon to put an end to the country's prudent monetary policy.

Zhao Qingming, a senior researcher with China Construction Bank, said there are still many uncertainties around China's price level in the next period, so the government should not change its prudent monetary policy.

"However, considering the difficult situation faced by many small- and medium-sized companies in China and the deterioration of the global economic environment, the monetary policy cannot be further tightened either," Zhao said.

Yang Ruilong said that although reining in inflation remains the top priority of the government at present, China should adjust the structure of its new loans and give more preference to small- and medium-sized companies in making loans.