New yuan-denominated loans reached 639.4 billion yuan ($93.57 billion), a decline of 134.6 billion yuan ($19.70 billion) compared to April, the People's Bank of China (PBOC) said Friday.

Both M2 and M1 saw stagnant growth in May. M2, the broad measure of the money supply, went up 21 percent year-on-year last month, with the growth rate edging down 0.5 percentage points from the previous month, while the M1 grew up 29.9 percent, compared with 31.3 percent in April, according to the PBOC.

The drop exceeded market estimates, as credit demand is believed to have fallen due to a recent tightening of monetary policy.

But analysts said the moderation of loans in May was generally in line with the lending growth for this year, which was set at 7.5 trillion yuan ($1.10 trillion) by Premier Wen Jiabao in his government work report in March.

However Lu Zhengwei, a Shanghai-based senior economist with Industrial Bank, pointed out the continuing growth seen in financing through bond issuance is an indication that the economic recovery may be flagging.

Bond issuance increased by 37.7 billion yuan ($5.52 billion) in May, growing for the second consecutive month. Higher rates of bond issuance often precede economic slowdowns, according to Industrial Bank's research.

The industrial production growth also slowed in May for a second month in a row, according to data published Friday by the National Bureau of Statistics (NBS).

Market sentiments have shifted from inflationary concerns to growth concerns, Lu said.

The consumer price index (CPI) recorded 3.1 percent in May, exceeding the 3 percent warning line for the first time this year, the NBS said. Analysts expect the CPI to continue to rise over the coming months.

Considering the slowdown in growth, we think the CPI could stay below 3.5 percent for 2010, Peng Wensheng, head of China Research at Barclays Capital said in a note.

Barclays Capital cut its previous forecast of three interest rate hikes for this year starting in the second quarter to two hikes beginning at the end of the third quarter.

The government is more cautious in raising the benchmark interest rates because of the European debt crisis and "the significant monetary tightening that has already taken place," Peng said.