JP Morgan cuts China's GDP growth forecast

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.