A backup plan may be required by China for stopping economic growth being cut short by a surprise dip in demand at home and abroad, which indicate monetary policy easing steps taken since the final quarter of last year are insufficient for dealing with the downturn.
On Saturday, the People's Bank of China cut down the amount of cash that banks must hold as reserves to free an estimated 400 billion yuan ($63.5 billion) for lending. The move came after data indicated the economy weakening, not recovering, from its slowest quarter of growth in three years.
"There are risks that policy loosening may under-deliver. If fiscal spending doesn't speed up quickly, GDP growth faces the risk of going below 8 percent in Q2," Zhiwei Zhang, chief China economist at Nomura in Hong Kong, told Reuters.
"The critical factor to watch now is fiscal policy. We expect more policy measures on this front will be announced in coming weeks. Premier Wen said on April 13 that "we need to prepare back-up plans in case growth weakens further". Now that growth has indeed weakened more, it is time for the back-up plans to be rolled out," Zhang said.
"The April data reconfirmed our view that the first quarter was not the bottom. If anything, the trend seems to be slightly worse than what we had priced into our call for 7.8 percent year-on-year real GDP growth in Q2," Yao Wei, China economist at Societe Generale in Hong Kong told Reuters.
"A quickened and strengthened policy stimulus is key for stabilizing China's growth in the coming months. Chances of more aggressive easing have increased," analysts at HSBC said in a client note.
"The immediate delivery of RRR cut right after the weak April data suggest that Beijing is responding actively. We expect more aggressive delivery of policy stimulus via quantitative easing, substantial tax breaks, fiscal spending and investment deregulation in the coming months to ensure a soft landing."