Speculation that China's weakest quarter of annual economic growth since the global financial crisis will trigger a flood of policy support to fight the downturn misses a crucial point - the taps are already turned on.

The annual rate of GDP growth in the first quarter slowed to 8.1 percent from 8.9 percent in the previous three months, the National Bureau of Statistics said on Friday, below the 8.3 percent consensus forecast of economists polled by Reuters.

China's stock market rallied despite the disappointing data, on the hope that the poor first-quarter showing would be enough to spur more assistance from Beijing, perhaps easier lending terms or more government spending.

But China's fiscal policy has been firmly pro-growth since the autumn of 2011 and easier monetary policy in the form of 100 basis points of required reserve ratio (RRR) cuts has given banks some 800 billion yuan ($127 billion) of extra cash to lend.

A huge bounce in new lending in March - 25 percent ahead of economist forecasts at 1.01 trillion yuan - signals that money is being put to work and the consensus view is that there's at least 1.2 trillion yuan more where that came from already earmarked for action for the rest of the year.

Policy has already been loosened. We might not have seen interest rate cuts or that many RRR cuts so far, but with loan data surprising on the upside it looks like policy has been loosened sufficiently, Zhang Zhiwei, chief China economist at Nomura in Hong Kong, told Reuters.

TAMING THE BEARS

Zhang's view resonates because he once had one of the most bearish views in the market on China's 2012 growth prospects.

At least he had until Friday's data showed China suffered its slowest three months of annual growth in three years, its slackest quarter on quarter expansion since 2008 and the weakest monthly rise in the economy's principal driver since 2003.

Zhang decided an upgrade was the right response after the first quarter's year-on-year growth of 8.1 percent beat his 7.8 percent call.

He's not alone.

We had taken into account for Q1 all the most dismal news and it didn't turn out that bad, so there's potential now to upgrade our forecasts, said Ren Xianfang, senior China analyst at IHS Global Insight in Beijing, where the team had expected growth of around 7.9 percent.

Thursday's loan data is arguably the clearest evidence that China's policy easing is gaining traction, suggesting that businesses have the confidence to borrow, or at least that the country's big state-backed lenders are being actively encouraged by policymakers to encourage them to do so.

Economic growth was last this low in the second quarter of 2009, when policymakers in the world's second-biggest economy were rolling out 4 trillion yuan ($635 billion) of stimulus to escape the grip of a financial crisis that had driven global trade - to which China's growth is levered - to a virtual halt.

Economists advise investors not to hold their breath waiting for more of the same this time.

Wait no further for another catalyst or for additional policy easing, the increase in credit will lead to a rebound in investment and GDP growth in Q2, analysts at UBS said in a note to clients.

Other signs of recovery come from China's official manufacturing Purchasing Managers Index (PMI), which hit an 11-month high in March as new orders bounced.

The official PMI's close correlation with the index of China leading indicators calculated by the Organisation for Economic Cooperation and Development (OECD also suggests growth is poised to turn around in coming months. The OECD's index has successfully forecast previous turning points in China's business cycle.

Industrial production and retail sales data released alongside GDP also suggest the economy may be regaining some traction.

A jump in steel production of 10.2 percent year-on-year in March, along with a rebound in vehicle output, machinery and cement production and a recovery in growth of sales of household electronic appliances to 8.4 percent suggest that the floor in economic activity has broad foundations.

But don't get carried away.

Zhang's full-year upward revision - hiking his growth estimate to 8.4 percent from 8.2 percent - still only brings him into line with the consensus view of private sector economists that China will suffer its slowest full year of growth since 2002 and that Beijing will pursue policies to cushion the decline from 2011's 9.2 percent, but not attempt to reverse it.

ABOVE THE 8 BALL?

China's government is actively pursuing a lower growth strategy and cut its official forecast for 2012 to 7.5 percent in March, an eight-year low, in order to create room for structural economic reforms, particularly on prices it sets, without sparking a surge in inflation.

So the risk that growth could slip below the 8 percent level, widely regarded as the threshold at which Beijing will wheel out the stimulus, might not be such a problem anymore.

Beijing's view of the pace that might constitute a hard landing is significantly lower than that of investors, meaning money managers who anticipate a policy response to a fall below 8 percent are going to be disappointed.

Especially given a statement late on Friday from Premier Wen Jiabao, at the end of a regular meeting of the State Council, China's cabinet.

He repeated the familiar refrain that economic policy would be fine-tuned in a timely manner, that inflation risks lurked and that restrictions to curb speculation in the real estate market were staying firmly in place.

Real estate investment was worth about 13 percent of China's gross domestic product in 2011 and the sector directly affects more than 40 industries, making Beijing's two-year-long campaign to curb rampant property speculation one that has been felt across the economic spectrum - and one that investors hoping for easing measures look to as their key barometer of change.

Easing restrictions on real estate would likely be the fastest way to engender a short-term bounce in economic activity, especially given the headwinds to export demand to which China's vast factory sector has massive exposure.

Global demand for China's exports may remain sluggish into mid-year, with much of the euro zone seen in recession and weak jobs data last week reviving concerns about the strength of the U.S. economic recovery.

While that leaves wide open the question for many investors of whether the bottom of the growth in China really has been reached in the first quarter, they would arguably do better to pay attention to what Shen Laiyun, spokesman at the National Bureau of Statistics, said at a news conference to release the GDP data.

Whether economic growth has hit the bottom in the first quarter, or when growth will hit bottom, in the first quarter or the second quarter, is not important. The important thing is we are pursuing high-quality growth, Shen said.

The momentum for growth in this year is not low, and we are confident that we can maintain relatively fast economic growth in this year.

(Additional reporting by Aileen Wang and Koh Gui Qing; Editing by Emily Kaiser & Kim Coghill)

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