China's central bank pledged to maintain loose monetary policy to support the economy and said it would ensure sustainable credit growth without resorting to heavy-handed quotas to rein in a lending spree.

In a statement that analysts said was intended to calm skittish markets, the People's Bank of China Vice Governor Su Ning said the central bank will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum.

The statement was posted on the bank's website after Wednesday's 5 percent fall in the Chinese stock market, its biggest daily drop in eight months, which had been sparked in part by worries that Beijing would restrict bank lending.

But there was also a hint of a gradual shift in policy footing when an unnamed official was quoted by state-run Xinhua news agency as saying that the central bank would fine tune its loose monetary stance and keep prices within a reasonable and controllable range.

Officials have expressed concern about the risk of stock and property bubbles inflating because of an unprecedented surge in bank lending, and the central bank said this week that consumer prices, now in mild deflationary territory, could start rebounding after the third quarter.

China has in the past used a quota system to control lending, telling banks not to exceed specific ceilings. This credit management was a key prong of China's monetary tightening in 2008 and it was subsequently blamed for contributing to the economy's sharp slowdown in the fourth quarter.

Su's comments appeared to rule out an imminent return to a strict, central bank-directed quota system.

They are responding to an incorrect interpretation by the market, said Ting Lu, economist with Merrill Lynch in Hong Kong.

Beijing has tamped down a little on the tide of money washing through the economy, but it is seen as unwilling to shift to more substantial tightening until a full-fledged recovery is assured.

WINDOW GUIDANCE

There will not be credit quotas this year, though there could be window guidance, Lu said, referring to more informal directions that Beijing gives banks to influence their decisions.

The benchmark Shanghai stock index <.SSEC> clawed back some lost ground, closing up 1.7 percent in topsy-turvy trading. Two initial public offerings in Shanghai soared beyond expectations this week, underlining how speculative fever had returned in full force to Chinese markets.

The bull run in Chinese stocks has stemmed in large part from the whopping 7.37 trillion yuan ($1.08 trillion) lent by banks in the first six months of the year, easily topping the full-year figure of 4.91 trillion yuan in 2008 and prompting questions about how Beijing will tame money growth.

We will focus on market tools, not quantitative-style control methods, flexibly using many kinds of monetary policy instruments, Su said. In this context, market tools likely referred to central bank's regular selling and buying of bills in the open market to influence liquidity.

Dong Xian'an, chief economist with Industrial Securities in Shanghai, said firm lending quotas were still very much on the table, because they are a direct way to manage the underdeveloped and occasionally unruly Chinese financial system.

Credit quotas are still an effective, if not the ideal, way to control credit growth, he said, adding that moving to a more market-oriented system would take time.

Lu at Merrill Lynch said that while Beijing was unlikely to impose hard-and-fast loan caps on banks, the central bank could well use a blend of moral suasion and punitive bill issuance to coax them into lending less.

It has already started down that path. Earlier this month, the People's Bank of China told a group of banks that have been particularly aggressive in lending that they would be required to buy 100 billion yuan in one-year special bills.

The special bills will carry a punitive yield of 1.5 percent and the banks were ordered to buy them in September -- a clear move to stem lending bursts that tend to come at quarter-end.

Another sign of Beijing softly tapping on banks' shoulders came on Thursday with an announcement from the China Banking Regulatory Commission that it will strengthen controls over loans made for corporate working capital.

($1=6.831 Yuan)

(Additional reporting by Langi Chiang; editing by Stephen Nisbet)

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