When two of China's most influential government policy think-tanks highlight the risk that growth will weaken on the same day that a widely-watched indicator fails to signal an expected upturn, investors are naturally nervous.

The question is whether a warning by the cabinet's Development Research Centre of the need to prepare for extreme risks, a State Information Centre assessment growth is slowing faster than thought and a slip in a private sector survey of factory activity signal a significant shift in the economy.

Adding in a risk-laden assessment from a third government think-tank in 24 hours suggest at the very least that investors should be erring on the side of caution given that growth has slowed for four successive quarters and almost certainty slowed again for a fifth.

If the government does not intervene and accelerate policy easing, growth will continue to slow, is the blunt assessment of Wang Jun, an economist at China Centre for International Economic Exchanges (CCIEE).

He told Reuters his first-quarter growth forecast had been cut to around 8 percent from 8.5 percent.

Wang's call echoes that of Zhu Baoliang, chief economist at the State Information Centre. He told Reuters he had trimmed his first quarter call to 8.2-8.3 percent from 8.5 percent and cautioned growth could slip below 8 percent if the central bank failed to unveil more policy easing.

For those paying close attention to the shrinking government growth forecasts and steady refrain of China's top leadership for the last 18 months that a structural slowdown to growth is inevitable - and desirable - then this is just reality biting.

China has long said structural changes in its economy, from demographics to investment and rebalancing to more consumer-led, domestic demand are damping down headline growth from three decades of roughly double-digit annual expansion.

The issue for investors is the extent to which the government has the policy flexibility to add extra impetus to slowing growth in the face of a deeper downturn than anticipated in external demand owing to the euro area debt crisis and a sluggish U.S. economy, while internal economic change is accommodated and whether it really signals the need for a more urgent or outsized monetary and fiscal response.

Yes, there's a slowdown. The question is how big is that slowdown? Ting Lu, China economist at Bank of America/Merrill Lynch in Hong Kong said.

If I'm an economist for the government, I've got to tell them to be worried about this and to do this and do that, Lu said. There's an element of policy persuasion in their work.

Indeed, Chinese policymakers prize social stability over anything else, a point underlined on Sunday by Zhang Ping, head of the National Development and Reform Commission, the nation's main economic planner.


There's doubtless an element of persuasion in the investment bank view of the world too, though both seem to be gravitating around core assumptions - more policy action is required to keep growth on track and the economy should expand a little over 8 percent in first quarter and around 8.5 percent for the year.

Both numbers are way above official government guidelines. China's 12th five-year plan assumes growth will average 7 percent over 2011-2015. The official 2012 target announced three weeks ago by Premier Wen Jiabao is 7.5 percent.

If Wen's targets are the minimum acceptable, the economy is on course to exceed expectations, especially if a rebound anticipated in the second half of the year comes good.

A handful of investment banks have recently upgraded their China growth forecasts, including UBS and Nomura, though only by enough to bring them more into line with prevailing consensus.

Data in the first two months of the year, smoothed to take into account the Lunar New Year distortions to output and investment, gave Nomura's chief China economist, Zhang Zhiwei, the impetus to upgrade his growth call. At 8.2 percent for 2012, though, he is still tilted towards the bearish side.

He says the downside surprise in Thursday's HSBC flash manufacturing purchasing managers index (PMI) for March, which showed factory activity shrinking for a fifth straight month, justifies caution.

The consensus for GDP growth is still about 8.5 percent and that's still a bit optimistic for me. For the first quarter we think GDP will be below 8 percent, so it's too optimistic to expect such a big recovery in the second half, Zhang said.


The question for many investors is now whether the bottoming of the growth cycle they had expected in the first quarter is now shifting into the second quarter and so depressing the scale of the second-half rebound.

One month's data is rarely reason enough to radically rethink an entire set of economic assumptions. But it's the sequential nature of the slowdown that concerns Tim Condon, head of Asian economic research at ING in Singapore.

The first quarter is always seasonally weak and the only piece of data we have so far for March, which we'd thought would indicate a bottoming out in manufacturing, erodes my confidence that that is the case. It looks like it may still be in a downtrend and may weaken sequentially into Q2, he said.

But if that is what's happening, Condon is confident of an immediate policy response.

CCIEE's Wang already detects evidence of that response in signs of relaxed controls on new railway projects to boost investment spending. He says there may also be a relaxation of approvals to build nuclear power generation plants.

The most important indicator for Wang is bank lending - if new loans reach 1 trillion yuan ($159 billion) in March, a level not attained since January 2011 and vastly above February's 710.7 billion yuan, the slowing trend in growth could be stopped in its tracks.

Gao Shanwen, chief economist at China Essence Securities in Beijing and a former economist at the People's Bank of China, the central bank, says downward pressure on the economy has grown since the start of the year and more explicit policy responses are need.

Measures so far have included cuts in bank reserves and an easing of credit conditions for small businesses.

There are signs of policy easing, but policy easing is not obvious. I believe monetary policy should be more aggressive, Gao said.

In his view, now is the time for the central bank to encourage commercial banks to lower lending rates to boost credit creation and for a government sitting on record revenue receipts and a tiny budget deficit to cut taxes to spur growth.

If growth slows further, both monetary and fiscal policies should be more pro-active, Gao said.