China's data miss paves way for more easing

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China released a flurry of data on Wednesday that broadly missed estimates, suggesting a weak start to the second quarter and underscoring expectations of further monetary stimulus from the government.

Industrial output rose 5.9 percent in April from the year-ago period, just shy of the 6 percent forecast by a Reuters poll and after climbing 5.6 percent in March.

April's retail sales grew 10 percent from the year-ago period, missing the the 10.5 increase expected and after rising 10.2 percent in March.

Year-to-date fixed asset investment grew 12 percent, compared with the 13.5 percent forecast.

China's Shanghai Composite index trimmed losses slightly to move back into neutral territory, in what some analysts say is a bet on further stimulus to come. The Hang Seng index traded flat.

"Today's activity data suggest that the momentum of growth during the first month of Q2 (second quarter) could have slowed further to below 7 percent," wrote Liu Li-Gang and Zhou Hao, analysts at ANZ, in a note. "We expect the PBoC (People's Bank of China) to cut the lending rate by another 25 basis points in Q2 in order to lower the cost of funds further for corporates."

The PBoC over the weekend cut interest rates for the third time in six months, in response to weaker-than-expected economic activity data, which has raised concerns that the government's annual gross domestic growth (GDP) target of "around 7 percent" could be at risk.

This comes after two rounds of cuts in the reserve requirement ratio (RRR) of major banks, the latest one bringing the rate down to 18.5 percent.

"A 100 basis point cut in the RRR in late April came too late to prop up last month's data but has pushed down market interest rates significantly in recent weeks and should boost lending going forward," Julian Evans-Pritchard, China economist with Capital Economics, said in a note.

"Policymakers are likely to respond to any further signs of weakness by continuing to step up policy support to ensure that growth doesn't slip much further," he added.

Capital Economics remains optimistic that the government's 7 percent growth target for 2015 will be met.

China's economy expanded 7.4 percent in 2014, its slowest pace in 24 years and undershooting the government's target for the first time since 1998.

"The current weakness still appears mostly concentrated in the industrial sector – broader indicators, including PMIs for the service sector, suggest that the rest of the economy is holding up much better. Crucially, industry is no longer as important to China's economy as it once was – GDP growth only slowed 0.3 percentage points in Q1 despite a 1.2 percentage point drop in industrial output growth," said Evans-Pritchard.