For now, policy easing is likely to come in the form of help to the most vulnerable sectors, rather than more aggressive steps such as cutting interest rates, but authorities are ready to step in with bolder measures if unemployment rises, policy insiders told Reuters.
China's central bank reportedly stepped in this week to avert any further shocks to the world's second-largest economy.
The People's Bank of China offered to lend $81 billion to big banks to reduce the risk of a credit crunch and a jump in interest rates heading into the long "Golden Week" holidays in early October, when demand for cash typically soars.
Despite the move, short-term lending rates dipped only briefly on Thursday, and traders said borrowing costs will start to rise again soon unless the PBOC continues to pump money into the system, highlighting growing nervousness in the market.
"Chinese authorities will likely introduce more supportive policies, including favorable tax and mortgage policies, before the end of this year to ease the downward pressures on the property market," ANZ economists Liu Li-Gang and Zhou Hao said.
"We thus expect more monetary policy easing in the remainder of this year, if the upcoming data continue to remain lukewarm. We cannot discount the possibility of an outright 50 basis point RRR cut (in bank reserve levels) for the whole banking system, or even a policy rate cut."
Analysts at Barclays were even more certain that policymakers will have to administer stronger medicine soon.
"Interest rate cuts are inevitable," they said in a note to clients, adding that the central bank's decision to lower the yield for its 14-day repos by 20 basis points on Thursday was a sign of the times.
"Today's move sends a clear and strong signal, in our view, that the People's Bank of China is more convinced that it needs to make more effort to guide interest rates lower," Barclays said. It predicted two interest rate cuts of 25 basis points each between October and March 2015.
Lower rates could arrest the cooldown in China's once red-hot property market, where fizzling growth is increasingly dragging on the broader economy, sapping demand for housing-related products from appliances and furniture to cement and steel.
Average new home prices across China fell 1.1 percent in August from July, accelerating from last month's 0.9 percent drop, according to a Reuters weighted home price index calculated from official figures.
Price falls spread to a record number of cities, and further declines are expected as cash-hungry developers cut asking prices and offer bigger discounts to attract buyers. Some economists think the slide will persist well into next year, citing huge inventories of unsold homes.
Four consecutive months of declines in home prices has left China's housing market close to wiping out its gains over the last year, a trend that could further hurt consumer confidence.
The property market accounts for roughly 15 percent of the economy.
"The softness in real estate investment will remain one of the major drags on economic growth," said Zhu Haibin, an economist at JPMorgan.
China's economy has had a bumpy ride this year. A bounce in growth in the second quarter was cut short in July, and data suggest the cooldown may have deepened since.
Stimulus measures announced earlier in the year already appear to be losing their punch.
Growth in factory output slid to a six-year low in August and import demand fell unexpectedly for the second month.
"SO MUCH MONEY"
In addition to government moves to accelerate spending, the PBOC has taken several steps this year to ensure ample liquidity and encourage increasingly risk-averse banks to continue lending at reasonable rates. Many banks still prefer to lend to state-owned firms, starving private companies of capital.
The central bank has declined to comment on the move to inject liquidity into the country's top five banks, via a policy tool known as the Standing Lending Facility, or SLF.
As the SLF is only valid for three months and requires commercial banks to pay for its use, analysts are divided about its impact on the real economy, while acknowledging it gave at least a short-term psychological boost to money markets, where banks lend to each other.
"Our bank is busy this morning lending with so much money in the market now," said one trader at a Chinese commercial bank in Shanghai, following reports that the central bank was offering to inject more money into the system.
Some argue that the extra funds were intended to help banks meet higher demand for cash at the end of each quarter, especially ahead of the long holiday. A flurry of stock market initial public offerings (IPOs) in coming weeks had been expected to amplify those seasonal stresses this year.
Short-term rates stabilized on Thursday, with the seven-day repurchase agreement rate little changed on the day. For the year, the rate has dropped 155 basis points since Dec. 30, though many economists are doubtful that longer-term borrowers are seeing any relief.
Publicly, central bank officials and advisers said China is not poised to unveil any dramatic stimulus to boost its economy.
"The central bank is erring on the side of caution by offering more than it usually would," said the analysts at Capital Economics, in reference to the latest liquidity move.
"Many have been forecasting a turn to broad stimulus in China for some time. The central bank's injection of liquidity has not changed our view that this remains wishful thinking," they said.
The government's bottom line is stable employment and no widespread debt defaults. Under that scenario, growth of 7.3-7.4 percent this year is seen as acceptable, sources said. Beijing's official target is around 7.5 percent.
(Reporting by Shao Xiaoyi in BEIJING and Lu Jianxin in SHANGHAI; Writing by Koh Gui Qing in BEIJING)
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