BEIJING (Reuters) – China is expected to report on Monday that economic growth slowed to its weakest pace in at least 27 years in the second quarter, reinforcing the case for more stimulus as a bruising trade war with the United States drags on.

Policymakers are likely to ratchet up support measures to prevent mass job losses that could pose a threat to social stability, but analysts say the room for aggressive stimulus is limited by fears of adding to already high debt levels and structural risks.

“The gloom hanging over China’s economy is unlikely to go away soon due to challenges on both domestic and external fronts,” analysts at ANZ said in a note.

Analysts polled by Reuters expect China to report gross domestic product (GDP) grew 6.2% in the April-June quarter from a year earlier, the slowest pace since the first quarter of 1992, the earliest quarterly data on record.

That would mark a further loss of momentum from the previous quarter’s 6.4%, which could bring the full-year economic growth to a near 30-year low of 6.2%.

The government has been leaning more on fiscal stimulus to underpin growth this year, announcing massive tax cuts worth nearly 2 trillion yuan ($291 billion) and a quota of 2.15 trillion yuan for special bond issuance by local governments aim at boosting infrastructure construction.

But the economy has been slow to respond, and business confidence remains shaky, weighing on investment. Investors fear a longer and costlier trade war between the world’s two largest economies could trigger a global recession.

The government will publish the second-quarter GDP data on Monday (0200 GMT), along with activity data for June which could point to continued weakness.

Data on Friday showed exports fell in June after the U.S. sharply hiked tariffs on Chinese goods, while imports shrank more than expected, highlighting sluggish domestic demand. Bank lending and credit data were largely solid, however.

A recent official factory gauge for June showed Chinese manufacturers were shedding jobs at the fastest pace since the global financial crisis a decade ago.

WILL PBOC FOLLOW FED?

Premier Li Keqiang said this month that China will make

timely use of cuts in banks’ reserve requirement ratio (RRR) and other financing tools to support smaller firms, while repeating a vow not to use “flood-like” stimulus.

Investors are eagerly waiting to see whether the People’s Bank of China (PBOC) will follow the U.S. Federal Reserve in easing policy.

Federal Reserve Chair Jerome Powell indicated again on Thursday that an interest rate cut from the U.S. central bank is likely at its next meeting later this month as businesses scale back investments due to trade disputes and a global growth slowdown.

Most analysts believe the PBOC is most likely to lower its newly developed market-based interest rates, or continue to cut the RRR, especially for small banks, if it opts to follow the Fed.

Economists in the latest Reuters poll forecast two more RRR cuts of 50 basis points each in this quarter and the fourth

quarter, but did not expect the PBOC to cut its benchmark lending rate, as it did in past downturns.

ANZ expects the central bank to cut the 7-day reverse repo rate by 5 basis points (bps), and cut the RRR by another 100 bps over the rest of the year.

The PBOC has slashed the amount of cash banks must hold in reserve six times since early 2018 to spur credit growth. It has also quietly guided short-term rates lower.

China does not need “big” stimulus unless the trade war worsens, a central bank adviser said early this month.

Leaders of the United States and China agreed in late June to try to get trade talks back on track after negotiations broke down in May, and Washington said it would hold off on additional tariffs.

But existing levies imposed by both sides remain in place, weighing on profits and supply chains, and the two sides remain at odds over significant issues needed for an agreement.

GRAPHIC – China’s economic trends: tmsnrt.rs/2iO9Q6a

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