CALL it the Year of Living Dangerously. Certainly it is a far cry from La Dolce Vita. In the opening days of China's annual session of the National People's Congress, one refrain was that 1994 would be a crucial year for economic reform. That could, quite possibly, turn out to be a great understatement. With senior leader Deng Xiaoping's health failing, and the potential for chaos that his death would leave open, the leadership has to be very careful. That does not mean it can afford toslow down the economic momentum too much. Making the economy boom and pressing ahead with a quasi-capitalist transformation have become basic tools in the communist regime's survival kit. On the other hand, like China's championship women runners, the regime knows that there is no gain without pain. The trick is to make sure those suffering - for example, workers in the city who face the prospect of losing their cradle-to-grave security blanket while inflation soars - do not hurt too badly. In short, the leadership will find itself engaged in a delicate balancing act. Listening in the Great Hall of the People to the most important papers of the Nation People's Congress - Premier Li Peng's work report, Finance Minister Liu Zhongli's budget and State Planning Commission Minister Chen Jinhua's Economic Plan - one gets the impression that China's leadership is acutely aware of the hazards ahead, but rather unsure of how to bypass them. Potentially, the biggest problems are the economic growth rate, which the government wants to bring down to nine per cent after 13 per cent expansion for two years running, and inflation resulting from overheating. Even among top officials, there are few who think the government will be able to cool the economy to such an extent and keep within the inflation target of 10 per cent. The momentum for growth is simply too great. Attempts to slow the economy have the unfortunate habit of hitting the government where it hurts the most - the state-owned enterprises, at least a third of which are heavily subsidised. For this reason it seems safe to expect a tussle over finance, with attempts to tighten monetary policy for a few months only to be followed by a loosening after enterprises complain too loudly. So far, the tools for fine-tuning are not precise enough to escape this almost inevitable scenario. However, that will not stop the government from trying. Indeed, it has set more specific limits on growth. For one, it has put a 1.3 trillion yuan (about HK$1.08 trillion) cap on investment in fixed assets, a 10 per cent increase over 1993. This compares with 50 per cent growth last year. PREMIER Li has declared that there should be no further expansion of construction projects. Even in the development of badly needed infrastructure, caution is the watchword. And, in principle at least, there should be no new development areas, after hundreds were set up early last year without government approval. But of all investment, infrastructure will be the most vibrant, and foreign contractors should reap big rewards here. Much will be said about state-run enterprises this year. Plans are afoot for the state to divest from about 100 of them as part of an experiment, though the precise structure of the new ownership has not yet been fixed. To help state enterprises, the government has exempted them from contributing funds for energy and transport projects, and will be allocated special funds for reorganisation in the case of bankruptcy and for resettlement of workers. But the government is likely to move cautiously. With inflation at more than 20 per cent in urban areas, there is simply too much to risk in terms of worker resentment resulting from massive displacements caused by an overly aggressive approach to enterprise reform. Agriculture has been declared the top priority, with the government pledging to raise procurement prices for cotton and grain. It will be a key area to watch after the widespread disgruntlement in the countryside last year due to failure of the government to pay farmers for their grain in cash. While the government is committed to raising rural living standards with the grain and cotton price increase, it remains unclear how this will happen while keeping retail prices from rising more than 10 per cent - the ceiling set by Premier Li's work report. Again, at the opening of the NPC, reference was made to the goal of turning state-run banks into commercial institutions run along Western lines. But progress is likely to be slow because the government cannot suddenly cut off all inefficient enterprises from funds. The impact on unemployment and social order would simply be too great. But while China attempts to create a more rational economic system, it would be foolish to anticipate appropriate political and social reforms. Capitalism may be sweeping China, but the leadership seems determined to keep the country socialist at least in name by the sheer force of propaganda. Premier Li has vowed to ''tighten control over markets for cultural products'' and encourage art which encourages people to ''work hard and selflessly'' and which ''reflects the socialist modernisation drive'', while never wavering in the development ofsocialist culture even as the capitalist economy expands. In other words, one can expect more socialist propaganda films for children at school while they continue to go home and watch cable television channels offering a wide variety of bourgeois programming as stations compete for viewers and advertising. One can also expect the government to follow a tough law-and-order line. Combating the ''six evils'' - such as pornography, prostitution and gambling - is high on the agenda. So is the crackdown on corruption. But these are perennial problems, and the government would be lucky to prevent them from getting further out of hand. There seems little chance of rolling back too far in these respects. The anti-six evils campaign is, after all, as old as the Li Peng government, and only moderately successful. With China now the fastest developing country in the world, it is easy to forget that the government coffers are getting rather bare. Finance Minister Liu Zhongli described the situation in state finance as grim. China is heading for a record budget deficit of nearly 70 billion yuan. Certain priority areas have been earmarked for government expenditure increases. Defence spending is to go up 20 per cent, investment in education will rise 18.5 per cent while science spending will be up nearly 20 per cent. However, with inflation in double-digits, the real increase in government expenditures is fairly modest.