China's leaders, caught off guard by a sharp economic slowdown and worried about the risk of job losses, are likely to resort to fiscal stimulus to revive growth after a run of monetary policy easings proved less effective, policy insiders said.
The world's second-largest economy grew at an annual 7 percent in the first quarter, the weakest rate since the global financial crisis, and data since then suggests it has lost further momentum.
"They are very worried. If they don't take bolder measures, it will be very hard to achieve the full-year growth target, and there is risk the slowdown may get out of control," an economist at a well-connected think-tank said of top policymakers.
"Fiscal policy will become more forceful, and infrastructure investment will accelerate, while monetary policy will be more flexible," said the economist.
The Politburo, the ruling Communist Party's top decision-making body, said last week it would "pay high attention to the downward pressure on the economy" and pledged to step up policy "adjustments" by boosting fiscal spending.
The government forecast a budget deficit for 2015 equal to 2.3 percent of GDP, but Finance Minister Lou Jiwei said in March the real fiscal deficit would be 2.7 percent of GDP, the widest since 2009, after taking into account unspent amounts from previously allocated funds.
Last year, government spending rose 8.2 percent, slower than the 9.5 percent goal.
The emerging view is that the direct impact of government spending would work where monetary policy, including two cuts in interest rates and two cuts in bank reserve requirements since November, has not.
The government is eyeing "a package of measures to stabilize growth and control risks", said a senior economist at the cabinet's Development Research Centre think-tank.
"There is no big problem in employment. They (top leaders) are more worried about financial risks and debt risks."
The National Development and Reform Commission (NDRC), the country's top planning agency, is already speeding up investment projects in several key sectors, including water conservation, environmental protection, power grids and health care.
And President Xi Jinping is spearheading the integration of Beijing with Tianjin and Hebei province, aiming to create a growth driver similar to the Yangtze River Delta around Shanghai and Pearl River Delta in Guangdong, the sources said.
The government has said the new metropolis would require investment of 42 trillion yuan ($6.8 trillion).
"It's hard to boost consumption while external demand is weak, so the only thing they can do is boost investment," said Lu Zhengwei, chief economist at Industrial Bank.
The NDRC has been struggling to lure private investment into such projects, adding more pressure on the government to spend.
Stimulus plans will, nevertheless, be restrained by the fact that China is still struggling with a mountain of local government debt from the 4 trillion yuan ($645 billion) stimulus rolled out in 2008/09 to cushion the impact of the global crisis.
The Finance Ministry and the NDRC did not immediately return requests for comment.
Most analysts expect the central bank to ease policy further to keep liquidity conditions favorable for an increase in spending, as well as to keep markets fluid amid concerns about the risk of corporate defaults and a restructuring of local government debt.
"Monetary policy will still be loosened, and we cannot rule out another interest rate cut, depending on economic data," said Lian Ping, chief economist at Bank of Communications.