The much anticipated annual meeting of China's National People's Congress (NPC) began yesterday. In the run-up to the nine-day meeting, hopes were high that China would announce more stimulus measures, propelling the benchmark Shanghai Composite Index to its sharpest gain in nearly four months on Wednesday.

Contrary to expectations, however, Chinese Premier Wen Jiabao did not announce new stimulus measures when he addressed the NPC yesterday. He said China's official GDP growth forecast of 8% could be met, but warned of unprecedented difficulties and challenges.

"The tone of the speech was clearly very growth-supportive but, because of the absence of new big-bang measures, the excitement preceding the speech was followed by mild disappointment," Calyon wrote in a macro report.

The markets didn't immediately reflect that disappointment, however, as investors remained optimistic that China has more stimulus plans in store. The Shanghai Composite Index, which tracks both A- and B-shares, closed 1% higher at 2221.08 yesterday, extending Wednesday's 6.1% rise. The Shenzhen Composite Index, meanwhile, rose a more modest 0.5% to 719.01.

Analysts say investors are seeing the absence of new stimulus measures as a deliberate approach by China to cautiously address the problem of global economic growth, with particularly attention to any impact on social stability. They say investors appear to believe, based on how they boosted share prices yesterday, that China will introduce new measures if called for.

China is among the most favoured markets of fund managers investing in Asia, largely because of the Rmb4 trillion ($586 billion) stimulus package announced in November, which is aimed at combating the most serious economic threat to the mainland since the Asian financial crisis in 1997. Before the stimulus package was announced, China was riddled with worries over the impact of the global financial crisis on both domestic consumption and exports.

The stimulus package, with a life span that extends until 2010, covers key areas including  affordable housing, rural infrastructure, railways, power grids, post-earthquake rebuilding in Sichuan, and social welfare to raise incomes. It also includes reforming the value-added-tax system to encourage investment in new technologies.

With foreign reserves and a budget surplus amounting to around $2 trillion, investors are confident that China has the capacity to further stimulate the economy if needed.

Sherman Chan, a Sydney-based economist at data provider Moody's, isn't as optimistic over China's prospects, however, and is bracing for a possible pull-back in markets in the coming days.

"China's economic conditions may appear less dismal than its Asian peers, but the government's growth target of 8% seems too optimistic," says Chan, who is responsible for analysing the economies of China, Hong Kong, India and Vietnam as well as monitoring sovereign wealth funds.

Key points from Wen's policy address "all sound rather familiar", Chan says, leaving little to be excited about. He notes, for instance, that the planned record deficit of Rmb950 billion ($136 billion) for 2009 was already revealed a few weeks ago.

"The improvement in market sentiment (as reflected in the stock market rally on Wednesday and yesterday) seems to be mainly fuelled by speculation on further stimulatory measures to be announced in coming days," Chan says. "If the expected fiscal stimulus measures are not delivered by the end of the nine-day meeting, market sentiment is set to tumble."

Chan points out that the main focus of the government seems to be social stability, "which is especially important this year", being the 60th anniversary of the People's Republic of China.

The announced 20% increase in agricultural subsidies will be a great help to the low-income rural region, Chan says, especially during this difficult period with the drought severely hurting production. Spending on the social safety net is expected to also jump by a much needed 17.6%.

"Amid worsening labour market conditions, low-income households have been squeezed. Layoffs and wage reductions hit consumer sentiment in China especially hard because of a weak social support system," Chan says. "Thus, increased government assistance should help to prevent social unrest during this sharp economic downturn."

Jing Ulrich, Hong Kong-based chairman of China equities at JP Morgan, notes that the government has proactively launched monetary and fiscal stimulus measures to spur growth and bolster key industries since last autumn.

An unofficial second phase of stimulus efforts announced in November has focused on social welfare and consumption, Ulrich says, and has seen the approval of an Rmb850 billion ($121 billion)  healthcare reform plan and local initiatives to support retail activity. Ulrich expects these issues to be at the forefront of NPC discussions, with delegates focusing on short-term measures to preserve employment and on longer-term policies to rebalance China's economy from a heavy reliance on investments and exports.

"With GDP growth slowing to 6.8% in the fourth quarter of 2008 and rising migrant worker unemployment," Ulrich notes, "delegates to this year's session are expected to show political unity in the face of global economic crisis."

Meanwhile, Calyon says the absence of new government spending measures does not come as a strong surprise since the fiscal package announced in November 2008 was already of paramount size, equivalent to aorund 6% of GDP for both 2009 and 2010.

"We believe that the main concerns of the authorities are likely to be about how to spend this money in the most efficient way, and not about additional big figures for fiscal spending," Calyon says. "What is required is more detail on the existing package, not an additional package."

Calyon is sticking to its projection of an economic growth of 6.5% in China in 2009 and 8.0% in 2010.