China GDP puts to rest worst fears over the economy

Why China won't see a hard landing: StanChart

China's better-than-expected first quarter gross domestic product (GDP) numbers have put to rest the worst fears of a hard landing, with economists forecasting a growth pickup over the coming months.

The world's second largest economy expanded 7.4 percent in the January to March period, slowing from 7.7 percent in the previous three months, but beating market expectations for growth of 7.3 percent.

"Growth did slow down, but it's not as bad as worst fears had suggested," Louis Kuijis, chief China economist at RBS told CNBC on Wednesday.

Keren Su | China Span | Getty Images

A sharp deterioration in economic data in recent months combined with signs of financial stress fueled heightened concerns about the stability of the mainland economy. In the past two months, China suffered its first-ever domestic bond default and has seen a series of small bankruptcies, prompting chatter that the country may experience its own "Lehman moment".

Last week, International Monetary Fund (IMF) Managing Director Christine Lagarde warned on the risk of a "hard landing" in China.

The latest growth numbers, however, have soothed these concerns.

Read MoreChina Q1 GDP growth slows to 7.4%, beats expectations

"We're at the bottom of the economic cycle, and things can only get better from here," said Dariusz Kowalczyk, senior economist & strategist, Asia ex-Japan at Credit Agricole.

Signs of rebalancing

Economists say policymakers will take comfort from the data as it reflects a rebalancing of the economy.

"While we see weakness present in heavy industry, the services sector is holding up better, giving the economy a bit of a cushion," said Kuijis.

"This will comfort them in their current approach of providing some support to growth without implementing major stimulus," said Kuijis, who forecasts full year growth to come in at 7.7 percent - above the government's 7.5 percent target.

Retail sales in China rose 12.2 percent in March from a year earlier compared with expectations for a 12.1 percent rise, while January-to-March fixed asset investment was up 17.6 percent from a year earlier versus market expectations for an 18.1 percent rise.

A floor to growth

Economists expect the mini-stimulus package unveiled earlier this month to arrest a slowdown in the economy will begin to boost economic activity as soon as this quarter.

The fiscal measures include tax breaks for small firms and plans to speed up some infrastructure spending, including the building of rail lines.

Read More China stimulus: Is Beijing going back to its old ways?

"The government's stimulus plans are key to stabilization in the economy," said Kowalczyk of Credit Agricole.

According to some economists, there are already early signs of an upturn in the economy.

Power consumption - viewed as a leading indicator - rose to 7.2 percent on-year in March, from 4.5 percent in the January-February period.

Key risks

Helen Qiao, chief economist, Greater China at Morgan Stanley is less upbeat on the outlook for the mainland economy, pointing to two key risks.

"On external demand - we're not expecting the U.S. to bail us out or nor are expecting emerging markets to stabilize any time soon," Qiao said.

Read More China March exports tumble 6.6%, worse than expected

Her comments follow dismal trade data earlier in the month which showed exports slumping 6.6 percent and imports plummeting 11.3 percent.

"On the domestic demand front, the mini stimulus will be helpful, but not get us out of the downward channel," she said.

Francis Cheung, head of China and Hong Kong strategy at CLSA agrees there are significant risks in the economy, particularly around the softening property market.

"You have a slowing property market and in the lower-tier markets, prices [have] started to fall and you could start seeing more defaults in the banking system," he said.

The property sector is an important pillar of growth for the mainland economy, accounting for around 16 percent of GDP, according to Nomura.