TANZANIA, Sept. 1 -- AUGUST had brought an unusual sight to Chinas banking sector. In the sprawling, marble-clad lobby of a bank branch in Shenzhen, posters advertise mortgage rates at multidecade lows.

Relationship managers who once spent their time restraining eager borrowers and enforcing lending quotas are now calling factories and property developers, offering terms that would have been difficult to imagine two years ago.

Yet the borrowers are not coming. Loan books are shrinking despite cheaper credit and aggressive efforts by banks to find new customers.

In July, Chinas banking system recorded its largest monthly contraction in renminbi loans on record. New loans fell by RMB340 billion, equivalent to 50.4 billion US dollars.

Th...