The solution looks as clear-cut as the problem: China has too much cheap money fueling a new investment boom, so it needs to curb credit and push up the yuan to shrink the trade surplus that is generating the liquidity.

The National Development and Reform Commission is hinting at tighter curbs on lending and new restrictions on China's perennially overheated sectors, including aluminum, cement and real estate.

Economists are confidently predicting the first increase in banks' reserve requirements in two years after annual gross domestic product growth in the first quarter accelerated to 10.2 percent.

But, this being China, things are not as simple as they seem. Beijing's ability to pull policy levers is complicated not only by the economy's poor responsiveness to market signals but also by the traditional political incentives at local level to pursue growth at all costs.

"We shouldn't lose sight of the important role local government investment is playing in boosting economic growth," said Sheng Hong, who heads the Unirule Institute of Economics, an independent research organization in Beijing.

Sheng said this week that the spurt in investment was strongest in urban infrastructure, transport, energy and telecommunications, all sectors that are under the government's control.

Li Xiaoxi, a professor at Beijing Normal University, agreed, saying: "What's more, local governments can always get large amounts of bank loans to pour into local projects." In Shenzhen, for example, Mayor Xu Zongheng said in an interview this month that China Construction Bank had offered to lend the city up to 100 billion yuan, or $12.47 billion.

This nexus between state-owned banks and local governments remains a defining characteristic of China's political economy despite a generation of market reforms.

"Many banks are willing to sign strategic contracts with local governments because the banks know that interest and principal are guaranteed," Xu said.

Banks extended 1.26 trillion yuan in new loans in the first quarter, more than half of the central bank's target for the full year. The real estate sector accounted for 14.84 percent of all bank loans at the end of 2005, said Wu Xiaoling, a deputy governor of the central bank.