The latest batch of mainland economic data has triggered a slew of cuts to analysts' forecasts for domestic growth this year, but officials are unlikely to loosen monetary policy in response.
Beijing's problem instead is how to channel already abundant financial system liquidity more efficiently, not create more of it, analysts say - despite data for May that dashed hopes of a strengthening economic rebound in the second quarter.
Export growth fell sharply to 1 per cent year on year last month, while industrial production in the first five months of the year saw the weakest growth since 2009 and new yuan lending in the month also dropped 14.5 per cent to 667.4 billion yuan (HK$844.6 billion) from a year ago.
All figures lagged behind market estimates.
Economists at UBS cut their 2013 growth forecast to 7.5 per cent from 7.7 per cent and RBS also cut its to 7.5 per cent. Nomura's chief China economist Zhang Zhiwei said the data put a downside risk on his 7.5 per cent call, despite it already being near the bottom of the consensus range.
Beijing set a growth target of 7.5 per cent for this year, a level many analysts believe to be the minimum level acceptable to the government.
Premier Li Keqiang said on Saturday that growth remained relatively high and reasonable. He added that the government would support growth through "activating" existing credit.
The challenge for policymakers is how to strengthen growth that risks falling below the official target, while not igniting a speculative run-up in asset prices.
Tao Dong, an economist at Credit Suisse, said the central bank had room for monetary easing as inflation is down, but the possibility of cuts in interest rates and the reserve requirement ratio is still low.
"The government is worried about hot money," he said, noting that such capital had flowed into the country after the two interest rate cuts last year. "The government's main concern is the inefficient use of liquidity, not a shortage of it."
Inflationary pressures remain and new figures showing slower price rises are distorted because of lower poultry prices caused by the H5N9 scare, Tao said, adding that inflation might pick up in the second half of the year.
Wang Tao, an economist at UBS Securities, agreed the existing credit in the banking system is sufficient. "The key is to better use it and guide it to the real economy," she said, adding monetary easing was unlikely even though inflation was subdued.
Consumer prices edged up 2.1 per cent last month from a year ago while producer prices fell 2.9 per cent, both trailing market estimates.
"The government has become more tolerant of a slower [credit] growth and increased its attention to structural reforms and preventing financial risks," Wang said, noting that the government should accelerate structural reforms to pump up economic growth, which is currently investment-driven.
But ANZ Banking economist Raymond Yeung Yu-ting believes the lower inflation rate provides the authorities with more room for interest rate cuts. "The central bank should slash interest rates as soon as possible to boost economic growth," he said.