BEIJING China's resolve to revamp its economy for the long-term good will be tested this month when a slew of data show growth is grinding towards a 23-year low, with no recovery in sight.
The median forecast of 21 economists polled by Reuters show China's economy likely grew 7.5 percent between April and June from a year ago, slowing from the previous three months as weak demand dented factory output and investment growth.
Growth prospects for the rest of the year look even grimmer if last month's unprecedented money market crunch, which saw short-term interest rates spike to record highs, eventually feeds into the real economy through higher lending rates.
Firms burdened by higher borrowing costs could shed jobs in coming months, analysts say, lifting unemployment that is a decisive factor in Chinese policymaking.
China's new leaders, President Xi Jinping and Premier Li Keqiang, have flagged for some time that the rapid GDP growth of the past three decades needs to shift down a gear as the economy moves towards consumer-led expansion.
Beijing has consequently resisted so far taking policy action to boost the economy, opting instead for slower but better-quality growth not reliant on extravagant investment funded by debt.
But things could change, especially as China's labour market betrays signs of its first crack.
"As China sticks to reform, the downward pressure on the economy will increase," said Jianguang Shen, chief China economist with Mizuho Securities Asia in Hong Kong. "Rising unemployment and bad loans will be inevitable."
GRAPHICS-China economy,trade: link.reuters.com/fut96s
The world's No. 2 economy grew 7.7 percent in the first three months, and Beijing hopes 2013 growth could hit 7.5 percent - impressive by world standards but the slowest in 23 years for China.
The gross domestic product report, due on July 15, will be preceded by trade and inflation data, with the latter, on Tuesday, likely to show lacklustre demand capping price pressures.
Consumer inflation is expected to quicken to 2.5 percent in June, well below the central bank's 3.5 percent target for 2013, and also below benchmark one-year deposit rates of 3 percent. Inflation had ran at 2.1 percent in May.
In a sign of the tough times ahead for firms, producer prices are forecast to drop for the 16th consecutive month, falling 2.7 percent in June, compared with May's 2.9 percent drop.
China's factories have been hammered in the past year by poor demand and excess capacity, especially among solar makers, ship builders and steel makers. Analysts say some have resorted to cutting prices to raise sales, but with little success.
Trade data, due on Wednesday, is forecast to show an improvement in both imports and exports compared with May, but in a feeble rebound not expected to herald a solid revival.
Exports are projected to have grown 4.0 percent in June from a year earlier, while imports are seen rising 8.0 percent.
JOB MARKET CRACKING
With the aftermath of Beijing's last spending spree still making its way through the economy, China's new leadership has seemed happy to let economic growth slide without taking drastic remedies.
Their predecessors unleashed 4 trillion yuan of state spending during the 2008/09 global financial crisis, a bold move that shielded the economy but left it with trillions of yuan of debt now hurting its banks.
But Beijing's determination to abstain from policy action may founder.
At a time when widespread corruption and a ballooning wealth gap are inflaming Chinese social tensions, a faltering job market could threaten the rule of the Communist Party already wary of the political upheavals in the Middle East.
China's largest private shipbuilder, China Rongsheng Heavy Industries Group Holdings (1101.HK), was reported this week to have cut 8,000 jobs in recent months.
A labour sub-index in a government survey of factories also showed employment contracted for the 13th straight month in June, although other official data showed job supply in cities still outstripped demand in the first quarter.
"Just a month ago, we were still expecting a mild recovery this year," said Xu Gao, an economist with Everbright Securities in Beijing.
"But the key assumption that the government will increase investment to stabilise growth has proven to be wrong. Just where is the government's tolerance for slower growth? We still need to watch for that."
Initial predictions that China's economy was set for a gentle recovery in 2013 have proven wildly optimistic. After slashing their forecasts, some analysts now believe China could miss its official growth target for the first time ever in 2013.
This means China's mild economic pick-up in the last quarter of 2012 was transient and that growth is likely to reverse into another cooldown in coming months after deteriorating from April through to June.
A Reuters poll showed growth in factory output probably slipped to 9.1 percent in June from May's 9.2 percent, while fixed-asset investment slowed to 20.2 percent in the first half of the year, from a rise of 20.4 percent in the first five months.
"Despite recent signs of bottoming out in domestic activity, the growth outlook remains fragile," said UBS chief China economist Wang Tao in a note to clients.
Worse, monetary conditions may be tightening. A Reuters poll showed M2 money supply growth retreated to 15.2 percent from May's 15.8 percent.
Banks are forecast to have lent 800 billion yuan in June, up from May's 667 billion yuan but below a reported surge to 1 trillion yuan of new loans in the first few days of last month - which probably hardened Beijing's resolve to let interest rates spike.
(Additional reporting by Xiaoyi Shao and Jenny Su; Editing by Alex Richardson)