The People's Bank of China cut the amount of cash that banks must hold as reserves on Saturday, freeing an estimated 400 billion yuan ($63.5 billion) for lending to add to the roughly 800 billion injected in two previous 50 bps cuts since the government tilted its policy stance towards growth in October.

The move came after data on Friday showed the economy weakening, not recovering, from its slowest quarter of growth in three years. Industrial production growth slowed sharply in April and fixed asset investment - a key growth driver - hit its lowest level in nearly a decade, confounding economists expecting signs of a rebound in Q2 data.

"There are risks that policy loosening may under-deliver. If fiscal spending doesn't speed up quickly, GDP growth faces the risk of going below 8 percent in Q2," Zhiwei Zhang, chief China economist at Nomura in Hong Kong, told Reuters.

"The critical factor to watch now is fiscal policy. We expect more policy measures on this front will be announced in coming weeks. Premier Wen said on April 13 that "we need to prepare back-up plans in case growth weakens further". Now that growth has indeed weakened more, it is time for the back-up plans to be rolled out," Zhang said.

April 13 was when China revealed its weakest three months of growth on an annual basis in nearly three years, at 8.1 percent.

Back then many economists, including Zhang, thought that would mark the bottom of China's current downswing - especially as new bank lending data for March published the day before had topped 1 trillion yuan in the strongest showing in a year - and triggered widespread raising of bearish 2012 growth forecasts.

Last week's data, by contrast, saw economists at UBS and Bank of America/Merrill Lynch slash their growth estimates within hours of the numbers being published and call for policy action to achieve growth of around 8 percent, widely regarded as government's aim, rather than the 7.5 percent official target.

FASTER, FATTER SPENDING

Faster, fatter spending on infrastructure and social housing, more tax breaks for business and incentives to boost consumer spending are among the typical additional measures called for.

That would be on top of the measures already anticipated - including another 100 bps of required reserve ratio cuts for banks in the second half of the year - to keep growth on track.

"We were wrong and we revise down growth forecasts," was the straight-to-the-point heading in the message line of an email sent to clients by Ting Lu, China economist at Bank of America/Merrill Lynch in Hong Kong after Friday's torrent of data drowned his call of a Q2 GDP bounce to 8.5 percent.

He now expects growth of 7.6 percent in Q2 and 8 percent for the year versus 8.6 percent previously. The consensus forecast for 2012 growth in the benchmark Reuters poll before Friday's data was 8.4 percent.

Lu is struggling to understand why the April data was so far away from market expectations and thinks a new reporting system requiring China's 700,000 biggest manufacturers, representing 90 percent of the total value added in the factory sector, to submit numbers directly the National Bureau of Statistics in Beijing - rather than local offices - might be the root cause.

Whatever is behind the drop-off, the new consensus view is that Beijing will have to raise its game to stop the rot.

Especially as trade data earlier in the week saw an annual rate of export growth around half the level expected and growth in imports grinding to a halt on a nominal basis in April, underlining China's vulnerability to weakness in global demand for goods produced in the country's vast factory sector.

"The April data reconfirmed our view that the first quarter was not the bottom. If anything, the trend seems to be slightly worse than what we had priced into our call for 7.8 percent year-on-year real GDP growth in Q2," Yao Wei, China economist at Societe Generale in Hong Kong told Reuters.

Yao expects action on three fronts - accelerating infrastructure investment, easing property tightening policies and rolling out a package of tariff cuts and consumption incentives.

CREDIT DEMAND KEY

Whatever Beijing's fiscal response, few expect stimulus spending modeled on the 4 trillion yuan ($635 billion) splurge unveiled in the wake of the 2008-09 global financial crisis, which buoyed growth but triggered spikes in inflation and real estate speculation that the government spent two years correcting.

Meanwhile further easing in monetary policy is likely to have to boost demand for credit, rather than simply making it available. Chinese banks need to lend about 850 billion yuan in both May and June to hit the 2.4 trillion yuan Q2 lending quota the market believes Beijing is working towards.

Monthly loan growth of 800 billion has only been achieved eight times since 2004, five of those occasions while China was rolling out its 4 trillion yuan stimulus program.

That, for many analysts, makes a fiscal response more likely given the government's deep pockets after a record tax take in 2011 and a modest deficit target of 1.5 percent of GDP - especially as going down that route makes it easier for Beijing to order loans to be extended to hit the credit creation target.

And with a leadership transition looming towards the end of this year, analysts are certain that China's Communist Party chiefs will do all they can to engineer a soft landing for the economy and as smooth a handover of power as possible.

"A quickened and strengthened policy stimulus is key for stabilizing China's growth in the coming months. Chances of more aggressive easing have increased," analysts at HSBC said in a client note.

"The immediate delivery of RRR cut right after the weak April data suggest that Beijing is responding actively. We expect more aggressive delivery of policy stimulus via quantitative easing, substantial tax breaks, fiscal spending and investment deregulation in the coming months to ensure a soft landing." ($1 = 6.3106 Chinese yuan)

(Editing by Alex Richardson)

• A Permanent Economic Emergency