Financial institutions in Shanghai extended $1.94 billion in foreign exchange loans during July, down from June and marking the largest monthly decrease in four years, according to a notice issued Monday by the head of the central bank's branch office in the city.

With most foreign exchange loans normally going to enterprises engaged in overseas trade, last month's decline in lending hints at the uncertainty surrounding the continued appreciation of the renminbi, Liu Dongliang, a foreign exchange analyst at China Merchants Bank, told the Global Times Tuesday.

"Expectations of a more valuable yuan will motivate foreign trade firms to withdraw loans in other currencies because it will be cheaper in the end to repay those loans. But if the yuan depreciates, more must be spent on repayment," Liu explained.

After a steep drop in foreign trade growth during May, the value of China's imports and exports for June was down by 0.7 percent and 3.1 percent respectively compared with the same month last year, according to official data from China's General Administration of Customs.

A later rebound in trade activity during July - when imports and exports rose by 10.9 percent and 5.1 percent respectively - was seen by analysts as a major factor behind the yuan's ascent to multiyear heights against the US dollar earlier this month.

"If the yuan continues on its current course, it's quite possible that we will witness a return to growth in foreign exchange loans during the months ahead," said Liu.

The low interest rates which typically accompany foreign exchange loans on the Chinese mainland also provide a further incentive to borrow when a rising yuan is spotted on the horizon, Liu went on to remark.

But enterprises have not been the only ones seen reeling in foreign exchange loans. According to He Weiwen, the co-director of the China-US-EU Study Center under the China Association of International Trade, domestic banks are now more selective with extending credit which could be used in speculative arbitrage maneuvers.

Recent risk management self-evaluations have led several commercial banks to scale back credit for businesses engaged in overseas trading, the China Business News reported Tuesday.