Complaints from China's local governments that central bank tightening is behind their growth, revenue and debt problems fans market talk of an about turn on policy, but Beijing's top leadership is more focussed on fiscal fixes than monetary moans.

A slew of tax breaks for small firms and cuts to red tape charges reveal the central government bias towards curtailing a borrowing binge like that which prompted Premier Wen Jiabao to declare the need for economic fine tuning after a visit last month to Wenzhou, the epicentre of a credit explosion.

Many investors took Wen's words to signal an imminent shift in interest rate policy, which is still ultimately determined by the top leadership, not the central bank.

But as China's leaders get set to chart the course for economic policies in 2012 at the Central Economic Work Conference - expected in early December - the likelihood is that the emphasis will be put on being fiscally pro-active and monetarily prudent.

Macro-economic policies will be kept stable, we cannot easily reverse the policy stance as inflation remains relatively high, said Guo Tianyong, an economist at Central University of Finance and Economics in Beijing.

Fiscal policy can play a bigger role in adjusting economic structures and resolving the rich-poor income gap, he said.

China arguably has more room for manoeuvre on the fiscal front -- revenue is up 28.1 percent year-on-year in the first 10 months and on track to hit a record 10 trillion yuan (1 trillion pounds) for the full year - than on monetary policy, with inflation at 5.5 percent at the latest reading still well above the 2011 target of 4 percent.

Crucially the People's Bank of China (PBOC), more hawkish on inflation than other government agencies albeit lacking independence, has managed to keep the upper hand in the latest wrangling over policy, analysts familiar with the policy debate say.

For the central bank, any rush to unleash waves of credit is risk-prone as inflation may regain steam if global commodity prices pick up, and the property sector could overheat again, wasting all of its previous efforts to curb price rises.


China's growth is slowing - down to 9.1 percent in the third quarter from 9.5 percent in the second-quarter and 9.7 percent in the first - and economists expect a slight moderation in 2012 to 8.6 percent, but even that remains within the government's comfort zone.

The job market also remains tight, in contrast to 2008 when collapsing exports put millions of people out of work, prompting the central bank to slash interest rates.

The PBOC has come under fire from local officials after it raised interest rates five times and banks' reserve requirement ratios (RRR) nine times between last October and July, which has put the brakes on many local investment plans.

Such criticism on the central bank gained momentum after a string of private company bosses in Wenzhou, China's entrepreneurial hub, skipped town after failing to repay high-interest private loans, official sources say.

Local governments and small businesses all hope for a loose policy environment, said an official at the central bank.

Some people even hope the euro-zone debt problems could be worsening so that the government may unveil fresh economic stimulus, said the official who requested anonymity.

But a big stimulus package seems unlikely given that Beijing is still fighting the inflation and credit after-effects of the 4 trillion yuan, 13 percent of GDP stimulus measures of 2008 that launched at the height of the global crisis.

That package sparked unfettered bank lending to local governments, resulting in piles of debt - officially estimated at 10.7 trillion yuan - that analysts fear could destabilise the economy.

Cutting taxes for companies and shoring up social safety nets to spur consumption preferred this time to pouring money into investment projects, such roads and airports.


Premier Wen ordered banks to lend more to small firms in the wake of his Wenzhou visit, but fell short of reversing the basic monetary policy tone.

Small firms have borne the brunt of the tightening campaign as banks have preferred lending to big, state-backed enterprises, striking the nerve of stability-obsessed Beijing given small firms account for 75 percent of China's urban jobs.

A 25 percent jump in new yuan loans in October from September signals that there has been a loosening of credit conditions in the banking system.

The PBOC meanwhile is playing it cool, saying in its quarterly report last week that policy would be fine-tuned if needed, but the overall stance would stay prudent.

It has pumped cash into the banking system via its open market operations and allowed yields on its bills to fall.

Few analysts expecting an outright cut to interest rates unless inflation falls convincingly below 4 percent and growth outlook deteriorates sharply.

Analysts at Goldman Sachs expect two 25-basis points rate cuts in 2012, but only when the headline inflation comes off to a level below the benchmark deposit rate of 3.5 percent, that they expect to happen in the second quarter of 2012.

Meanwhile, the chances of cut in RRR, which is at a record high of 21.5 percent for big banks, before the end of 2011 remain low unless capital inflows dry up to put strains on bank liquidity.

The near-term liquidity conditions are likely to get some support from the central government's move to spend its cash surplus, as it usually does towards the end of each year.

We do not believe China's monetary policy bias will shift further from neutral to easing soon, but we do think the worst time of monetary tightening is behind us, said Dong Tao, an economist at Credit Suisse in Hong Kong.

(Editing by Nick Edwards)