China Shaping Up for Another Disappointing Quarter

Beijing's Central Business District
Frederic J Brown | AFP | Getty Images
Beijing's Central Business District

A slew of Chinese economic data for April released on Monday cast further doubt over the recovery in the world's second largest economy, raising talks of a possible interest rate cut in the current quarter.

Industrial output rose by 9.3 percent year on year in April from 8.9 percent in March, but came in below forecasts for a rise of 9.5 percent. Non-rural fixed asset investment grew 20.6 percent for the January to April period - against expectations for a rise of 21 percent - after accelerating 20.9 percent in the January to March period.

(Read More: China Industrial Output Up 9.3%, Misses Forecast )

"Overall, the data look quite sluggish, suggesting the first month of the second quarter doesn't seem to have seen a pick-up in momentum," Li-gang Liu, chief China economist at ANZ told CNBC on Monday.

Discussing the tick up in industrial output, Zhiwei Zhang, chief China economist at Nomura said this has been boosted by the two extra working days in April this year compared to 2012.

"Stripping out the working-day distortions, we believe sequential growth in industrial output growth likely slowed," said Zhang, who sees gross domestic product growth slowing to 7.5 percent in the second quarter.

Highlighting sluggish activity in the manufacturing sector, surveys released earlier in the month, including the official and HSBC Purchasing Managers' Index (PMI), showed activity moderating in April from March .

Economists said the slowdown in fixed asset investment growth was also a concern, given that it took place despite the pick-up in housing construction. Real estate investment rose 21.1 percent in January-April from 20.2 percent January-March.

"This mainly reflects the weakness in manufacturing and infrastructure construction. As the housing market measures start to bite, there will be further downside in investment," said Alistair Thornton, senior China economist at IHS, referring to measures announced by the government in March to curb speculative demand and stabilize prices.

While retail sales were in line with expectations, rising 12.8 percent in April from 12.6 percent in March, experts said this was likely driven by seasonal factors, including the Golden Week holidays which fell at the end of the month as well as a surge in gold and jewelry sales as demand jumped on slumping gold prices.

Time for a Rate Cut?

According to Liu of ANZ, weakness in the mainland economy warrants a rate cut. He believes the People's Bank of China (PBOC) could lower interest rates at some point in the second quarter.

"Indeed, China needs to think about stimulus. Perhaps an interest rate cut needs to be done quickly, this would help to reduce incentives for capital inflows and reduce spending costs for many firms," he said.

(Read More: Has China's Economy Hit a 'Dead End'?)

Unlike neighbors including India, South Korea and Australia, China has not lowered borrowing costs this year. The PBOC last cut interest rates in July 2012 by 31 basis points to 6 percent.

Thornton said while he is not expecting rate cuts soon, if economic conditions deteriorate further the central bank "may be tempted to slip in a rate cut."

By CNBC's Ansuya Harjani