The 4 trillion yuan ($628 billion) stimulus package launched to counter the post-Lehman global crisis won worldwide applause but left a stellar bill - a 10.7 trillion yuan ($1.7 trillion) mountain of local government debt, the risk of sour loans as growth slows and a super-heated property market.

Add in a naturally declining growth rate and China's ability and willingness to deliver a forceful response to mitigate the global impact from Europe's deepening debt crisis are seriously curtailed, analysts say.

"Not only is the policy room smaller, but the incentives for the government to produce a large stimulus package are smaller," Qinwei Wang, China economist at Capital Economics in London, told Reuters.

The National Development and Reform Commission (NDRC), China's top economic planning agency, is fast tracking investment projects to support economic growth, expected by economists to slide this year to its weakest pace since 1999.

Premier Wen Jiabao's had pledged to make the task of supporting growth more prominent, although the latest spending push is more cautious and selective than the 2008-09 stimulus, focusing on infrastructure, steel and green energy projects.

"The size of the stimulus this time round will be much smaller judging by both the needs and the constraints," Lu Feng, an economist at Peking University, said.

Few analysts can give an exact tally on the "mini" stimulus, which also includes tax cuts and subsidies for consumers.

Beijing has pledged to stabilise growth with policy fine-tuning. So far that has also included three cuts in banks' reserve ratios since November. There is little sign that Beijing will loosen its grip soon on the property sector, as it did in 2008.

Back in 2008-09, Beijing sought to stimulate growth in what it described as a "fast and heavy-handed" way. The central bank shifted policy gears to complement the pump-priming, as the economy sank into deflation.

"INVESTMENT ADDICTION"

In the dark days of the financial crisis, Beijing won international praise for turning the economy around and bolstering global growth.

But the unfettered spending fuelled economic distortions, ranging from over-investment to a come-back of state-owned monopolies.

The new investment push has already drawn fire from some Chinese academics, who argue that the short-term gain in economic growth could further worsen the economy's structure. For example, investment accounted for half of GDP growth.

"This will deepen the economic imbalances and make the further adjustments even more difficult," said Zhao Xijun, an economist at Renmin University in Beijing.

"It's like taking drugs. It's difficult to give up once you get such investment addiction. It's time to give up the addiction and reform economic structures to help long-term growth."

Although billed as a 4 trillion yuan package, only a quarter of that came from the central government. The rest was largely financed by banks that lent heavily to local governments, resulting in a staggering 10.7 trillion yuan in debt.

Standard Chartered Bank estimates that the total spending as a result of the two-year stimulus could be 10 trillion yuan.

Chinese banks have been told to roll over such loans as local governments face a revenue crunch due to falling land sales. But they are unlikely to open their purse strings again.

"The key constraints are policymakers' hesitation to repeat the mistakes of the 2008 stimulus and banks' reticence to lend on such a grand scale," Stephen Green, chief China economist at Standard Chartered Bank, said in a research report.

Beijing still has formidable fiscal firepower backed by huge revenues, but it also faces a big debt burden and obligations to shore up social security systems.

Various China government agencies have different estimates of the total size of local government debt. Yang Kaisheng, head of the Industrial and Commercial Bank of China, has put total central and local government debt at 43 percent of GDP.

Some analysts put total public debt, including implicit liabilities such as bond issues by the railway ministry, policy banks, and bad loans in the banking system, at 80-90 percent of GDP -- higher than the international standard of 60 percent.

Shi Xiaomin, vice president of China Society of Economic Reform, a think-tank under the NDRC, said the new stimulus may not be effective due to the problem of overcapacity.

"Banks are having difficulty lending even though they have money because companies don't want to borrow," he said.

The central bank is widely expected to cut bank reserves further and may even cut bank lending rates to spur growth.

REFORMS

With China's underlying potential rate of growth falling in line with the country's demographic shifts and the diminishing dividends from entry into the World Trade Organisation and market-based reforms, Chinese leaders feel less urgency to stimulate growth, analysts say.

The government, which has long pledged to wean the economy off dependence on investment and exports, has set an annual GDP growth target of 7.5 percent for 2012. Between 2011 and 2015 it aims for average growth of 7 percent a year.

"China's potential growth rate is falling but it's not entirely a bad thing. If we assume potential rate is 8 percent, that means we don't need to worry too much if growth falls to 7 percent," said Lu at Peking University.

China's annual economic growth is expected by analysts to fall to 7.9 percent in the second quarter, the first dip below 8 percent since 2009. They forecast 8.2 percent for 2012, the lowest level since 1999.

Xia Bin, a former adviser to the central bank, said last week that slowing growth alone does not imply a hard landing, as long as the job market and the banking sector remain stable.

In 2008-09, a sudden collapse in China's exports threw some 20 million migrant workers out of job.

Reforms will be the key to averting a sharp slowdown, analysts say. Beijing appears to be moving in the direction.

"New sources of growth need to be unleashed, and we think the government must speed up reforms to encourage more private investment, including in the service sector," Tao Wang, China economist at UBS, said in a research report.

Wang at Capital Economics expects growth to slow to 7.8 percent in the second quarter before rebounding to 8.5 percent in the third, with the full-year rate slowing to 8.5 percent from 9.2 percent in 2011.

But Shi at the think-tank sounded more bearish, expecting full-year growth to slow to around 7 percent.

($1=6.37 yuan)

(Editing by Neil Fullick)

• A Permanent Economic Emergency