In the short term, there is still room for China to cut benchmark interest rates and taxes to help manufacturers and small to medium-sized enterprises, according to Zhang Jie, a professor with Institute of economic research at Renmin University of China in Beijing.

Zhang suggested the government could consider a targeted tax cut for hi-tech manufacturing firms if growth slowed further, but such a move would take some time to implement.

Smaller, private-sector manufacturers, in particular, have struggled to survive as operating costs have skyrocketed and their exports have been hit hard by US trade tariffs. Smaller firms are also facing financing problems as borrowing costs have risen and liquidity tightened, while corporate defaults also picked up again in June.

But at a symposium hosted by Premier Li Keqiang to analyse China’s economic situation with experts and entrepreneurs, leading construction machinery manufacturer Xugong Group confirmed the weak state of the manufacturing sector, state media reported.

The growth rate of manufacturing investment for the January to May stood at a low 2.7 per cent from a year earlier, showing that Chinese manufacturers were conservative and in a wait-and-see mode because of the uncertain external environment and given the nation’s internal structural problems, the statement said.

“China is facing a lot of structural problems, and these domestic problems are the main drivers of its slowing growth, not only because of the trade war,” said Becky Liu, head of China macro strategy at Standard Chartered Bank. “So this means even if the trade war is resolved, the domestic issues haven’t changed.”

Zhong Zhengsheng, director of macroeconomic analysis with consultancy CEBM Group, a subsidiary of Caixin Insight Group, agreed that Beijing may tweak monetary and fiscal policy, but will be mindful of financial risks because of its already high level of debt and the fragile nature of the housing market, both of which could intensify if economic growth remains sluggish.

“I think policy is going to be pretty flexible [going forward],” said Zhong. “Housing prices are rising again. Whenever there is policy easing, the flow [of funds] immediately goes to the property market rather than the real economy. Another problem is debt. In the first quarter of this year, debt returned again, even though there’s not much economic growth. So I think it’s very difficult for [policymakers] to introduce flood-like stimulus.”

Analysts and market watchers are waiting to see if the Politburo, the top decision-making body of China’s ruling Communist Party that is due to meet at the end of the month, will signal of expansion of bond issuance by local governments for the rest of the year, indicating an acceleration in efforts to fund more infrastructure projects across the nation, Standard Chartered’s Liu said.

“If there is further downward pressure on the economy, there is a chance that China would increase its fiscal deficit this year, especially for local governments,” Liu said.

Nomura analysts, in a report released on Thursday, forecast an increased budget deficit of 4.9 per cent of GDP in the second quarter, up from 3.4 per cent a year ago, due to additional government spending.

To date, fiscal stimulus measures announced by the government include a cut in personal income taxes, a reduction in value-added taxes (VAT) and social security contribution fees for companies, as well as increased spending in a range of areas such as environmental protection, rail projects and logistics.

The government expects that its cut in the VAT rate from 16 per cent to 13 per cent for manufacturing industries, and from 10 per cent to 9 per cent in transport and construction, which came into effect at the start of April, will have a supportive influence on the economy for months to come.

Headwinds in the coming months would include continuing weak external demand as seen from worsening manufacturing purchasing mangers’ index – a gauge of production activities – in major economies around the world as effects from the trade war further affect global trade, said Ding Shuang, Standard Chartered Bank’s chief economist for Greater China and North Asia.

The rebound in industrial output and retail sales in June, Ding pointed out, were propped up by one-off and seasonal factors, such as increased car sales ahead of new emission standards, and is likely to fade in July and August.

He said the downward pressure on growth, with deflation possibly hitting in the third quarter, would prompt the central bank to maintain an accommodative stance on monetary policies, which includes cutting banks’ reserve requirements by a full percentage point, and medium term lending facility twice in 2019.

But the People’s Bank of China would be cautious about cutting benchmark rates as capital outflow pressure mounts amid rising expectations of a US Federal Reserve rate cut, said Ding, who nonetheless expected China to achieve growth this year closer to the top-end of the 6 to 6.5 per cent target range set by the government.