BEIJING • China's central bank held off from immediately raising borrowing costs yesterday despite the US Federal Reserve's rate hike, a decision that came just as economic data for last month showed that the economy is losing steam.

With the prospect of fresh United States tariffs on Chinese exports approaching, the world's second-largest economy is already slowing after a stronger-than-expected start to this year.

A campaign to curb indebtedness at state firms and local governments and the effort to shrink the shadow-banking sector are adding to a cyclical moderation in the pace of growth.

Industrial output rose 6.8 per cent last month from a year earlier, versus a projected 7 per cent, while retail sales expanded 8.5 per cent, versus a forecast 9.6 per cent.

Fixed-asset investment rose 6.1 per cent year on year in the first five months, compared with an estimated 7 per cent - the slowest increase in data back to 1999.

With a sharp deceleration in credit growth and the threat of a worsening trade dispute with the US, Chinese businesses face an increasingly uncertain outlook. The People's Bank of China (PBOC) has tried to support growth by increasing liquidity, and even though it could still pace the Fed's hike as forecast by economists, the fact that it has not done so immediately is being interpreted as a sign of concern over the economy.

"It's a rotten set of data on all fronts," said Mr Michael Every, head of financial markets research at Rabobank Group in Hong Kong.

"The PBOC is still throwing money into the economy at the longer end of the curve and housing is still booming in many cities, yet obviously it's not enough. The longer-term implications are really serious and the trade war hasn't even started yet."

The central bank is studying policies to boost loans to smaller firms, PBOC governor Yi Gang said yesterday in a speech at the annual Lujiazui Forum in Shanghai.

The central bank will use monetary policy tools including reserve requirements and relending to support those companies, which contribute to about 80 per cent of China's employment and 60 per cent of economic output, Mr Yi said.

China has been trying to ensure liquidity supply to cushion any economic slowdown and help lenders meet repayment obligations.

It boosted injections via the medium-term lending facility last week to the most in more than a year to support smaller firms, while in April it cut the reserve requirement ratio by 1 percentage point, citing a similar goal.

The central bank has not changed the benchmark one-year lending rate since October 2015.

While economists are interpreting the lack of an increase in the seven-day reverse repurchase rate as a signal of easing policy, the central bank can react at any time to the Fed's decision, particularly if downward pressure on the yuan materialises.

"It's possible that the PBOC will follow in due course," writes Mr Tom Orlik, chief economist at Bloomberg Economics. "The decision not to do so... looks like an indication the PBOC is more focused on supporting growth and alleviating financial stress as markets fear an increase in corporate defaults."

BLOOMBERG