A manufacturing slowdown on the mainland has fuelled speculation that President Xi Jinping's officials will switch their focus in coming months from taming credit growth and financial risks to supporting economic expansion.
A factory gauge for February, known as the purchasing managers' index (PMI), fell to a seven-month low, HSBC Holdings and Markit Economics said on Thursday. Barclays said that the central bank had turned "more supportive" as the overnight loan rate sank to the lowest level in 10 months.
Investors are focused on financial stresses in the world's second-biggest economy after the near-default last month of a high-yield trust product and as economists forecast China's slowest expansion in 24 years. While the government has cooled credit growth, a record 2.58 trillion yuan (HK$3.27 trillion) of new financing in January highlighted the challenges that remain.
"It's relatively difficult to pursue two policy goals at the same time," said Ding Shuang, the senior China economist with Citigroup in Hong Kong. "On the one hand, China needs to delever and on the other hand it needs to ensure a certain level of growth."
Ding said that the government will move to support growth if a slowdown "challenges" its bottom line of a 7 per cent expansion. Last year, the economy grew 7.7 per cent.
The preliminary PMI reading of 48.3 was less than the 49.5 median estimate in a survey of economists. A number below 50 indicates contraction.
"In the first half the economy will continue to slow down since the monetary conditions are tight," said Zhang Zhiwei, Nomura's Hong Kong-based chief China economist. "We think the economy will recover in the second half due to loosening of monetary policy in the second quarter."
Zhang predicted that the central bank will cut lenders' reserve requirements by 50 basis points in the second quarter and another 50 in the third quarter, adding that "the credit supply will pick up as well".
By contrast, JP Morgan Chase said that reserve requirements are likely to stay unchanged and "credit tapering will continue".
China's overall credit rose about 18 per cent in January from a year earlier, slowing from growth of 18.4 per cent in December, according to UBS.
In 2009, when the government was driving stimulus spending to counter the effects of the global financial crisis, increases reached as much as 36 per cent.
Last month, new local-currency lending was 1.32 trillion yuan, the highest level since 2010, the People's Bank of China said in a February 15 statement.
"Beijing policymakers should and can fine-tune policy to keep growth at a steady pace in the coming year," said Qu Hongbin, HSBC's chief China economist in Hong Kong.