What’s on deck for China investors? Barclays Capital analysts still hold dear to the economy bottoming out this quarter. The third quarter will be lackluster. Two steps forward. One step back.

On the policy side, BarCap says to look for the following:

• The PBoC will continue its “window guidance”, encouraging commercial banks to extend more loans to government-supported industries, such as power, water, railways, infrastructure in the western region and strategic industries;

• The PBoC is likely to conduct a cautious exchange rate policy, given current export weakness, capital outflows and market expectations of currency depreciation. Although we think the currency will still strengthen against the dollar by year end, we cannot rule out the possibility of periodic depreciation (down 0.36% YTD);

• The Ministry of Finance will probably lower personal income taxes and business taxes for small to medium enterprises, increase export tax rebates and replace sales taxes with a VAT to reduce the overall tax burden;

• The National Development and Reform Commission will likely approve more investment projects, concentrating on welfare-related investment, such as hospitals and schools, infrastructure in the western region and strategic industries, such as new energy, new materials and environmental protection;

• The government may also use interest rate and credit policies to encourage first-time home buyers and buyers who are upgrading their housing, and developers constructing small- and medium-sized apartments, although the headline housing-purchase restrictions are likely to remain; and lastly from Barclays Capital:

• Beijing may adopt other policy measures to support economic activity, such as opening up more strategic industries (eg, railway, power and telecom, and services) to private investment, providing special assistance to small and midsized enterprises and export companies, and, possibly, offering specific consumer spending subsidies.

“The latest policy developments have given us more confidence that growth is likely to bottom during the second quarter, as we expected, although the recovery starting from the third quarter is likely to remain modest. We maintain our longstanding 2012 growth forecast of 8.1%,” analysts led by Lingxiu Yang said after market hours Friday.