By Chris Oliver, MarketWatch

HONG KONG (MarketWatch) -- China won't make major changes to its loose monetary policy in the coming year, favoring the use of a smaller tools to tamp down credit growth, analysts say, an outlook at odds with market fears that the central bank is about to hit the brakes in a big way.

The People's Bank of China is likely to be guided by tame inflation data and concern over a potential rise in non-performing loans that could result from higher interest rates, especially at a time when companies are piling on debt, according to analysts at Banc of America Securities-Merrill Lynch.

"We do expect some 'fine-tuning' measures to cool the stock and property markets. However, we think the overall monetary and credit policy stance will continue to be relatively loose until spring 2010," wrote Merrill analysts headed by T.J. Bond.

Instead, the first interest rate hikes are likely to come from South Korea, Australia or India. The PBOC and the China Banking Regulatory Commission will continue with small adjustments -- such as its recent move to tighten loan provisions for second-home mortgages and to issue bank bills to soak up liquidity.

"We expect this type of response to continue, in which asset prices are met with micro tools, not macro tools such as interest rate hikes. Overall, we do not think asset prices will be a major factor in China's decision to raise rates," Bond said.

Merrill forecasts new lending in the second half of the year will ease to 2.6 trillion yuan ($380.5 billion), with annual credit growth to rise 30% on year, still well above the 18.8% rise last year.

The Merrill view agreed with sentiment in a report Thursday from Macquarie Securities analyst Michael Kurtz, who said investors are getting too pessimistic about China's credit policies.

"Markets may be growing too focused on the expected start date of China's inevitable monetary tightening rather than the likely trajectory of tightening," Kurtz said, adding that China hasn't tapped the brakes enough to in real terms to slow growth momentum.

Bloomberg News reported Friday the CBRC had sent a directive to banks earlier this week that toughened capital requirements, possibly resulting in reduced lending or the sale of shares to meet the statutory 12% capital adequacy ratio.

The report, which cited three unidentified sources, said the banks received the notices Wednesday requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from their supplementary capital totals.

However, Merrill's Bond said the reported new requirement would still be in keeping with the practice of relying more upon its arsenal of smaller policy pools to manage liquidity and doesn't justify the stock market's concern over China's overall financial environment.

Full steam ahead?

Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.