Profits are increasing even though financial conditions are tightening in some significant areas of the economy; lending rates have inched higher, regulators have clamped down against risky lending and have moved to take the heat out of the property sector.

The economy is also comfortably on course to meet the government's GDP growth target this year of around 6.5 percent.

Although it is far from certain the government will tighten credit conditions further, some economists expect policymakers to move that way once President Xi Jinping consolidates power at a key five-yearly Communist Party Congress later this year.

"There's more room to experiment (with tightening credit) ... It is the right timing and moment to do so against this backdrop of a strong growth momentum," said Andrew Fennell, the main sovereign analyst for China at Fitch Ratings.

The government has made reducing China's debt burden a priority this year after credit soared following the global financial crisis.

The International Monetary Fund warned last week that China's credit growth was on a "dangerous trajectory" and called for "decisive action." The Bank for International Settlements said in September excessive credit growth was signalling a banking crisis in the next three years.

But a few things are falling into place to ease worries that further moves to curb debt would prompt an economic and financial crisis.

Thomson Reuters data of almost 1,000 Shanghai-listed non-financial companies shows net profits rose almost 70 percent in the first quarter from the same period of 2016.

Results so far from the second-quarter earnings season suggest continued momentum on a pick-up in global trade and economic activity: Gansu Jiu Steel <600307.SS> expects a 54 percent first-half net profit rise, while China Coal Energy <601898.SS> expects net profit of 1.5-1.8 billion yuan from 616 million a year earlier.

For the 104 companies for which 2017 estimates are available, analysts predict a 38.25 percent overall increase in net profits, compared with 10.6 percent growth in 2016.

Annual profits either shrank or barely grew over 2011-2015, which contributed to the rapid accumulation of debt.

Benchmark policy rates have been on hold for almost two years. But average lending rates edged up to 5.67 percent in June, the highest since September 2015, from 5.53 percent in March, the second-quarter policy report from the People's Bank of China showed earlier this month.

Total social financing (TSF), a broad measure of credit and liquidity, fell to 1.22 trillion yuan in July from 1.78 trillion in June. Still, TSF grew 13.2 percent from a year earlier, suggesting authorities do not want to hit the brakes too hard.

RISING BANKRUPTCIES

The government appears more tolerant of company failures as well. A Fitch analysis of files from the Supreme People's Court shows there were 4,700 bankruptcy cases between January and July this year, compared with 5,665 for all of 2016 and 3,684 in 2015.

Even if this signals Chinese policymakers are more tolerant of companies being pushed into bankruptcy, analysts say it also suggests they are moving slowly so as not to destabilise the economy.

Still, only 12 percent of the bankruptcies were in the indebted state sector and the figures pale in comparison with bankruptcies in developed economies: they were 10 times lower than in France and four times lower than in the United States last year.

A large chunk of the corporate debt, which the BIS estimates at almost 1.7 times the economy, has been taken by non-listed entities, especially in the state sector, which employs over 60 million workers. Analysts say many state-owned companies are loss-making and only kept alive by loans from state banks.

"Deleveraging is a process that is very long," said Iris Pang, ING's Greater China economist. "No one wants the clean-up to happen in a short time span, because it would be very costly not only for the banking sector but for the whole economy in terms of defaults, write-offs of banking loans and redundancies."

CASH RESERVES

Corporate deposits have also risen sharply, while a strong correlation between finance pumped into the economy and the performance of the Shanghai stock market has broken down for the first time in at least two decades, suggesting the performance of those companies, on aggregate, may not be as credit dependent as in the past.

China Inc's new profits are not entirely risked away in new spending or investments. Cash holdings and short-term investments for non-financial, Shanghai-listed corporates rose 26.3 percent in the first quarter from a year earlier, having posted double-digit growth rates for the past three years.

Oxford Economics' Louis Kuijs said China could rein in credit so that it stopped growing by 2021 and only lose 1 percentage point of economic growth a year.

"They would achieve something that is good for the long run while they would still end up with growth that is ... pretty good in any other economy," said Kuijs, who is head of Asia economics.

"They should consider it because it's not the end of the world."