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China moving closer to unleashing fresh stimulus

China's slowing economy has stoked chatter among economists that Beijing is moving closer to unleashing fresh monetary and potential fiscal stimulus measures as soon as next quarter.

There are increasing concerns over growth among the leaders, said Zhiwei Zhang, chief China economist at Nomura, citing discussions at the State Council's weekly meeting on Wednesday.

In a statement following the meeting, Premier Li Keqiang said the government should roll out measures as soon as possible to stabilize growth and boost domestic demand, according to state news agency Xinhua.

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"This reinforces our view of policy easing picking up in the second quarter," Zhang said.

Nomura expects the People's Bank of China (PBoC) will cut banks' reserve requirement ratio (RRR) - or the amount of cash they must set aside as reserves - by 50 basis points in the second quarter and by another 50 basis points in the third quarter.

(Read more: Goldman Sachs slashes China growth outlook)

The central bank last cut its RRR in May 2012. The RRR now stands at 20 percent, near its record level of 21.5 percent.

The likelihood of an interest rate cut is rising as well, said Zhang. However, he noted that it is not yet in the bank's baseline forecast.

Societe Generale holds a similar view, forecasting a 50 basis point RRR cut early in the second quarter, in order to offset potential capital outflows.

"The recent economic deceleration has indeed been more than what Beijing is willing to tolerate in the short term," the bank said.

(Read more: Default risks trigger fresh fears over China property market)

According to some market watchers, the PBoC's decision to widen the yuan trading band over the weekend - following a spate of disappointing economic data - could also be part of the government's efforts to stabilize growth. Economic indicators such as retail spending and industrial output for January-February, for example, came in well below market expectations.

"While band widening itself has little impact on the economy, the possible consequence could be used to stabilize the growth. The weak economic data implies that it is unlikely to see CNY appreciation and capital inflows after the band widening," said Haibin Zhu, chief China economist at JPMorgan wrote in a report over the weekend.

If this is the case, "CNY depreciation could support exports, and capital outflow will drain domestic liquidity and open the window for RRR cuts by the PBoC," he said.

(Read more: China yuan band widening a sign of caution, not reform zeal)

The yuan fell to a 13-month low on Friday and is set to post its biggest ever weekly fall. The currency has tumbled more than 1.2 percent against the U.S. dollar so far this week.

Fiscal stimulus on the cards

According to Nomura, China's fiscal policy stance may also become more supportive in in the second quarter, with increased spending on infrastructure investment.

Societe Generale believes infrastructure investment would be the most effective tool; however it is not anticipating a big spending package.

"The most likely measure is to bring forward some of the infrastructure projects in the new urbanization plan," it said.

Last week, China quietly revealed that it had signed off on 142 billion yuan ($23 billion) worth of railway projects this year, according to a Reuters report.

—By CNBC's Ansuya Harjani. Follow her on Twitter @Ansuya_H

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