China's new bank loans for May showed a slowdown from April. In May, the country's mostly state-dominated banking sector extended about 551.6 billion yuan, or about $85 billion, in new yuan-denominated loans, down from 739.6 billion yuan in new loans in April. But the drop in new loans suggests a marginal rather than a sharp tightening of credit. And even as China considers raising interest rates further and implementing other measures to tighten credit, new risks to growth are emerging that will challenge the leadership's resolve in combating inflation. STRATFOR watches China's monthly new loans because China's economic growth is hugely dependent on credit expansion. The government has faced serious challenges in 2011 amid its attempts to curtail credit expansion after witnessing the inflationary side effects of the loose credit and monetary policies it enacted to avoid recession in 2008-2009. In China, it is the volume of loans rather than the price that matters because the government authorizes lending by quantity rather than quality and makes credit available at below-market rates for corporate borrowers. Even after a year of increased restrictions on banks' required reserves and interest rate hikes, China's depositors face negative real interest rates on their deposits, while corporations still enjoy low interest rates on the loans they receive. While the government shows signs of continuing to tighten control over monetary growth — facing an impending, politically sensitive inflation reading that could exceed 5.3 percent for May and even hit 6 percent in June — it has not shown remarkable strength in tightening the volume of new credit. Specifically, May's new lending numbers are lower than those from May 2009 or 2010 but are very similar to those from several months in the second half of 2010. Therefore, they do not reveal any new determination by the government to forcefully slow lending. Based on figures from the first five months of the year, China's bank lending is still set to see strong growth in 2011 — it grew 17.6 percent in the first quarter, and if the pace of the first five months continues, it will reach nearly 9 trillion yuan in new loans by the end of the year. More importantly, while the government has attempted to slow the increase in new loans, the banks and companies have found new ways to expand credit through bond purchases and other financial instruments. In the first quarter of 2011, bank lending, once the largest and telltale indicator, only made up about 57 percent of total new credit expansion. Inflation remains the top political concern for Chinese authorities. Specifically, high prices for food, fuel and housing are straining the society's numerous low-income earners, adding to other social factors that could spur new bouts of unrest. But China cannot curtail credit too harshly for fear of slowing down the economy. In recent months, new threats to growth have emerged, primarily in the form of high commodity prices, domestic energy shortages, bad weather and weak foreign demand. These factors have combined to pose new challenges to heavy industries that rely on commodities imports and small- and medium-sized exporters that are seeing costs rise sharply. The worker riots in Chaozhou, Guangdong province, that began June 6 have called attention back to unpaid wages, a widespread problem when foreign demand dropped in late 2008 (especially in the manufacturing hubs of the Pearl River Delta). The Chaozhou incident might reflect rising difficulties for small manufacturers amid higher wage costs, or even foreign export orders dropping, for which some new evidence has appeared in recent weeks. But these firms are precisely the ones that suffer from even a marginal tightening of credit because they lack good political connections to access loans if availability is reduced. If the risk of bankruptcies and unemployment rises in the manufacturing regions, China's leaders could back away from even moderate attempts at tightening policy.