JP Morgan cuts China's GDP growth forecast

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JP Morgan Chase & Co on Wednesday joined an increasing number of foreign institutions that have lowered their expectations for China's economic growth due to the country's worse-than-expected economic data in April.

The investment bank said in a research note that it cut its forecast for China's 2013 GDP growth to 7.6 percent from its previous 7.8 percent estimate.

China's industrial output expanded at a faster rate in April to 9.3 percent year-on-year, up from 8.9 percent in March, the National Bureau of Statistics said on Monday. However, the figure is lower than the 9.4 percent growth expected by most investment banks.

Fixed-investment growth was also weaker-than-expected at 20.6 percent from January to April, compared with 20.9 percent in the first quarter. It was 21.2 percent in the first two months.

China's real GDP growth slowed to 7.7 percent year-on-year in the first quarter, after a rebound to 7.9 percent in the fourth quarter of last year, which was much weaker than expected.

"The April data suggest that domestic demand remains on the weak side, and by extension has also caused a softening in the services sector," said Zhu Haibin, an economist with JP Morgan.

Despite strong growth in real estate and railway investment, investment in the manufacturing sector continued to slow down and the recovery in industrial production was weaker than expected, the note said.

Meanwhile, inventories built up quickly in some major industrial sectors, such as steel, machinery and automobile, suggesting that the economy may face another round of destocking pressure in the coming quarters, it added.

The divergence between rapid growth in total social financing and the weak economy remains a factor, and the impact of credit growth on economic growth is also weaker than expected, Zhu added.

It's likely that some liquidity has been simply flowing between the banking system and shadow banking activities, leading to high growth in aggregate financing but without supporting economic activities.

Meanwhile, there's no indication that the country's policy stance will be shifted quickly to support near-term growth, JP Morgan said.

"We revise down the GDP forecast in 2013 to 7.6 percent from the previous forecast of 7.8 percent. By quarters, we trim down the sequential growth in the next three quarters to 7.4 percent, 7.8 percent and 7.8 percent quarter-on-quarter, respectively, compared with the previous forecasts of 8.2 percent, 8.0 percent and 8.0 percent. Correspondingly, growth rates in year-on-year terms in the next three quarters will be 7.8 percent, 7.7 percent and 7.4 percent, respectively," the research note said.

According to Zhang Zhiwei, China economist at Nomura Holdings Inc, a growth rebound in April is likely, but not sustainable.

"We believe a rebound would be driven by working-day distortions instead of better fundamentals," said Zhang.

Nomura expects industrial production growth data for April to show a rebound, mostly because the month had two more working days than in 2012.

"However, after adjusting for working-day distortions, we expect to see continued weakness," Zhang said.

The official Purchasing Managers' Index, or PMI, which is not affected by the working-day distortions, fell to 50.6 in April from 50.9 in March despite favorable seasonal factors.

"We expect it to drop below 50 in May," said Zhang.

For Zhang, there are two key risks to 2013 forecasts. The larger risk is policy uncertainty, as political pressure could force the government to maintain its currently loose policy stance longer than expected. The other is external demand, given the uncertain outlook for the European Union and the United States.

According to the Bank of America Merrill Lynch Fund Manager Survey for May, a quarter of the respondents said a hard landing in China and a commodity collapse are their number one "tail risk", an increase from 18 percent in April. About 8 percent of fund managers in Japan, the Asia-Pacific rim and global emerging markets expect China's economy to weaken over the next 12 months, compared with about 9 percent who said a month ago it would strengthen.

Meanwhile, a research note from Spain's BBVA said that despite the weaker-than-expected performance, China's government still has room to adjust its monetary and fiscal policies if the economy continues to weaken, as inflation has been well under target.

China's Consumer Price Index, a main gauge of inflation, rose 2.4 percent in April from a year earlier.

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