THE independence of China's regional governments is becoming embarrassing, as well as posing an economic risk. A circular issued by the highest levels of the Chinese Government and the Chinese Communist Party informed local authorities last week that they must ''strictly abide by'' the policies and regulations put forth by the State Council and the Party CentralCommittee. Shouldn't that go without saying? In what is, after all, still an authoritarian state, shouldn't the central government be able to exercise its power without having to plead for compliance? Apparently not. Throughout China, economic activity is racing ahead with only scant attention being paid to Beijing's efforts to control or even co-ordinate it all. Officials at every level - provincial, country, municipal and even enterprise - pay mere lip service to Beijing while they write their own policies. They establish their own special development zones, set their own growth rates, promote property and stock markets, and organise financing networks. Conventional wisdom has it that this unbridled flow of decision-making power from the centre to the regions is an unavoidable consequence of the economic boom sparked by Deng Xiaoping's famous ''southern tour'' early last year. But similar trends were in evidence much earlier, and were at that time attributed to something quite different - economic stagnation. The fact that regional autonomy has grown in both good times and bad, together with a mindful glance at China's warlord past, suggests that tight central control is not necessarily a natural arrangement. Nor has the loss of central power been entirely unintentional. One facet of Deng Xiaoping's reform implemented in fits and starts over the past 14 years, has been to grant greater autonomy to local authorities in order to foster accountability and create incentives for growth. ''The Central Committee has assigned power but it can also take back that power,'' Deng warned confidently in 1988. BUT last week's circular, analysts say, offers proof that Beijing is now losing confidence in its ability to regain some degree of control. ''It drives the central authorities crazy that local renegades are implementing policies that contravene national law,'' says a Hongkong-based China specialist. How do ''renegades'' get away with it? One reason is China's inadequate regulatory structure. Beijing lacks the personnel and resources to monitor compliance with regulations and to investigate violations. ''People no longer ask 'Is this legal?' '' says a Beijing investment consultant. ''Instead the question they are asking is, 'Who will check?' '' The answer, in many cases, is: ''Nobody.'' It is primarily the task of the State Administration for Industry and Commerce (SAIC), an organisation directly under the State Council, to supervise commercial activities and crack down on illegal practices. But according to a specialist on Chinese investment law: ''The SAIC just doesn't have enough bodies to do this work.'' Local authorities have been testing the limits, and when they find that their first tentative efforts to circumvent central directives go undisciplined, they become increasingly bold. One symptom of this regulatory laxity has been an explosion in the number of ''special developmental zones''. The mainland press recently reported that while fewer than 100 development zones had been approved by Beijing, more than 2,000 were launched last year. Vice Premier Zhu Rongji has estimated the number of zones in existence at 6,000. Mr Zhu has also warned that because the money and land devoted to these zones is excessive, most will have to be eliminated. But even Mr Zhu, who enjoys a reputation as something of an administrative superman (he made headlines last year when he travelled to Hainan Island to shut an unauthorised stock exchange) will have trouble acting on his warning. When it becomes time to decide which few of these thousands of zones will be allowed to operate, China's centuries-old system of political patronage will come into play. For example, the central government has decided that the number of special zones inthe coastal province of Shandong, now close to 300, ought to be reduced to 40. That decision, a source in Beijing said, has set off a mad rush of municipal officials from Shangdong to the capital, all are looking for their friends in high places to either offer new favours or call in old ones. It is thus more likely that Shandong's 40 survivors will not be the zones with the greatest chance of success, but rather the ones sponsored by the most powerful officials who have the best connections. Administrative power is not the only thing flowing out of control. The unrestrained movement of money is also frustrating Beijing's efforts to reassert central control over economic growth. Beijing has had much to say in recent weeks on the dangers of economic overheating, and persistent rumours say the Ministry of Finance is about to announce a clampdown on lending for the second half of this year. Economists note, however, that in spite of previous attempts by Beijing to limit credit and reduce growth rates, the nation's money supply has continued to expand. This clearly shows that a significant portion of the Chinese capital market operates independently of the central banking system. Here too, China's inadequate regulatory framework is partly to blame. With rules on lending between banks and between enterprises vague, people are giving themselves the benefit of the doubt. According to government guidelines, interbank loans are supposed to be short-term loans made only when the borrowing bank can't cover its deposits. But, says a Western diplomat, banks are now borrowing from one another in order to loan the money out again on the open market. ''It is very common for banks in Guangdong, which often have more money than they have been authorised to lend out, to issue loans to banks in poorer places like Xinjiang, which then turn around and lend it out,'' he says. Finance authorities are reportedly working on tighter regulations to govern this sort of interbank lending, but given the slow pace of bureaucracy, the practice is not likely to stop soon. NON-BANK financial institutions, such as China's many trust and investment corporations, also have large sums of money to lend. Central bank directives to control lending, which have proved ineffective anyway, do not even apply to this form of credit. Even if Beijing does succeed in tightening up official sources of credit, Chinese enterprises holding surplus cash will still have incentives to lend it out. By any standard of measurement, the renminbi is losing value quickly. Double-digit inflation is rapidly eroding the domestic purchasing power of renminbi, and the US dollar rate on currency swap markets continues to rise. It is thus more prudent to unload it, either by spending it or lending it (interest rates now run as high as 40 per cent), than to hold on to it. Beijing, of course, does not approve of widespread inter-corporate lending, but as a Beijing accountant says: ''Enterprises are finding very creative ways to work things out, and nobody seems able to stop them.''