China Economy Shows Strain, Policy Shift Eyed

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That was followed by data from the People's Bank of China showing that new lending was less than 75 percent of the level expected -- a big surprise for a financial system that typically sees its biggest lending splurge of the year in January.

"That supports our view that there should be more RRR cuts," said Kevin Lai, an economist at Daiwa in Hong Kong, referring to the bank reserve requirement ratio. A cut in reserves would release cash into the economy.

"We expect there should be four this year, so we expect the next one very soon," Lai said.

The combination of data points raises numerous worries even though Lunar New Year holidays fell in January, which can make it difficult to interpret economic figures.

First, that the domestic demand which has shielded the world's second-largest economy from slackening exports is not as resilient as thought. Second, that China's ability to support a frail global economy by absorbing more imports is undermined.

And third, that weaker-than-expected lending is a function of banks being at their limit of credit creation, meaning the central bank will need to expand the range of policy tools beyond cuts in the reserve requirement ratio and use of open market operations if it is to effectively boost the supply of credit.

"The trade data, especially imports, show that domestic demand is slowing quite rapidly. But the lending data is more indicative of that right now, the capacity to ease liquidity conditions is not as great as people thought," said Yao.

"Right now the binding constraint is not the required reserve ratio, but the loan-to-deposit ratio."

Lunar New Year distortions will make policymakers wary of any hasty reaction. Most analysts expect them to assess January and February data combined before deciding whether the current policy of gentle easing should be intensified.