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The odds of Beijing intervening to support the sluggish Chinese economy are narrowing following a slew of data that points to the weakest growth for China since the global financial crisis.
The economic pain may not be over, either, as some economists forecast that the slowdown could deepen further in the second quarter of the year.
It all adds up to increasing pressure on Beijing to provide the economy with a lift if the government wants to meet its full year growth target of around 7.5%.
"The government probably will have to provide some supporting measures," said Wei Yao, China economist at Societe Generale in Hong Kong. "I think the slowdown is not over yet and our expectation is that the deceleration will continue into Q2," she added.
A preliminary March factory survey released on Monday showed the manufacturing sector shrinking for the third straight month. It followed weaker-than-expected industrial output figures for January and February and a shocking fall in exports.
The factory data weighed on global markets as investors worried about the impact of a slowdown in China on the world economy, although Chinese shares listed in Hong Kong rallied on hopes for stimulus measures from Beijing.
As the first data covering March, the flash Markit/HSBC purchasing managers' index (PMI) provided the first strong indication on the health of the economy this year. Data for January and February was distorted by the Lunar New Year holidays, economists say.
The PMI fell to an eight-month low of 48.1 in March from February's final reading of 48.5. The index has been below 50 since January, indicating the sector is contracting.
Factory output and new orders both weakened but new export orders grew for the first time in four months, the survey showed, suggesting the slowdown has been driven primarily by weak domestic demand.
"Usually, for the month of March, the PMI will rebound, because after Chinese New Year, there should be some activity coming back, but this PMI is disappointing," said Societe Generale's Yao.
She expects economic growth to ease to 7.2% in the first quarter of this year from the fourth quarter of 2013 and then to cool further in the second quarter to 6.9%.
Nomura expects growth to slow to 7.3% in the first quarter and then to 7.1% in the second, while Barclays sees it slipping from 7.3% to 7.2%.
The predictions would all represent the lowest growth since the first quarter of 2009 when it was 6.6%.
POLICY RESPONSE
Analysts said any policy measures to support the economy would be modest and certainly not on the scale of global financial crisis, when a torrent of lending led to an unprecedented buildup in debt.
"We think the government will roll out policies to support the economy," said Sun Wencun, an economist at Citic Securities in Beijing.
Hongbin Qu, chief China economist at HSBC, suggested those measures could include "lowering entry barriers for private investment, targeted spending on subways, air-cleaning and public housing, and guiding lending rates lower."
Economist Zhiwei Zhang of Nomura in Hong Kong reckoned the central bank would also play its part, by reducing banks' compulsory reserves - currently 20% for big banks. This would free up funds for banks to lend.
Earlier this month, sources told Reuters the central bank was prepared to loosen monetary policy in order to keep the economy growing at 7.5%. Last year, China's economy grew 7.7%, the same pace as in 2012.
Premier Li Keqiang last week said China would speed up investment and construction plans to ensure domestic demand expands at a stable rate - an indication authorities are considering practical measures to support the economy.
Not all analysts are convinced though that Beijing will step in to support the economy since there are no signs that unemployment is a problem.
"We don't think the latest data warrants a policy response, just yet, at least," said Julian Evans-Pritchard, Asia Economist at Capital Economics in Singapore.
EMPLOYMENT IS KEY
After three decades of double-digit growth, Beijing has said repeatedly it is willing to accept a lower rate of expansion while it tries to reduce the economy's reliance on investment and exports. It wants consumption and services to play a bigger role.
Earlier this month in a major speech to parliament, Li said Beijing had the means to ensure growth would be "reasonable" this year, which he suggested would be around 7.5%.
Analysts said Beijing had the policy flexibility to ensure that the target is met but they suggested the real concern for policymakers would be if employment started to fall sharply.
Li says growth needs to be 7.2% to create 10 million new jobs in 2014. About 13 million new jobs were created last year.
There are few reliable indicators on China's jobs market but the HSBC manufacturing PMI suggests employment has been shrinking for five straight months.
Finance Minister Lou Jiwei has said a healthy labour market was more important than reaching the government's 2014 growth target of about 7.5%.
Something close to 7.5% "should be acceptable as long as there is no significant risk to the labour market," said Sun Junwei, HSBC China economist in Beijing.
Yao of Societe Generale said the 2014 growth target of 7.5% is too ambitious - but failing to reach it would be positive.
"It is a good thing if they miss it," said Yao, whose full-year growth forecast is 7.1%. "They can make the case that it is a necessary sacrifice."
