China’s economy continues losing steam, more stimulus expected

China's industrial production fell below expectations last month to 6.8 percent, according to the latest report published by the National Bureau of Statistics. Analysts' expectation stood at 7.7 percent. Moreover, urban investment and retail sales also missed forecasts in January and February, suggesting that the economy is losing momentum and warrants further support measures.

"Jan-Feb data on real economic activity came in much weaker than expected. Crucially, industrial output growth was the slowest in six years. Retail sales grew 10.7 percent, the lowest since November 2000", said Dariusz Kowalczyk, Senior Economist, Credit Agricole, Hong Kong. "Fixed asset investment expanded 13.9 percent, the least since December 2000. The data is consistent with Q1 GDP growth slowing to 7.1% year-on-year. It will augment calls for policy easing and push CNY IRS rates and the yuan lower."

China cut its gross domestic product (GDP) growth forecast for this year to 7 percent last week, from the 7.5 percent goal set in 2014. Economists are worried over the rising risk of deflation in the country owing to falling global oil prices and industrial overcapacity. The People's Bank of China cut its benchmark deposit and lending interest rates in February for the second time in three months, due to low inflation.

"All activity data is lower than expected....The authorities should feel the pressure from the poor data. Q1 GDP growth is likely to be lower than Q4 and won't be higher than 7.1 percent", said Zhang Yiping, economist at China Merchants Securities, Shenzhen. "The central bank has already cut RRR and interest rates in the first quarter ... we need to see whether employment is deteriorating, if that's the case, then monetary policy will continue to be loosened."

The yuan was largely unchanged at 6.2622 yuan against the dollar. Prior to market open, the PBOC set the midpoint rate at 6.1597 per dollar, weaker than the previous fix of 6.1572 and the spot yuan opened at 6.2635 per dollar.

According to a recent Reuters survey, the yuan is expected to rise only mildly over the coming year as strong US dollar, the threat of deflation and weak economic growth raises the possibility of further stimulus from the PBOC.

"CNH and CNY are flat against the USD. It's not for lack of trying; the PBoC depreciated the CNY fixing by 0.05% on Monday, the first trading day following the release of the US jobs data, and by another 0.01% yesterday. Nor do we think hot money outflows turned into inflows", said Tim Condon of ING. "We attribute the outperformance of CNY and, through arbitrage, CNH, to exchange market intervention related to the Two Conferences. We recently revised our yearend USDCNY forecast to 6.36 (spot 6.26, Bloomberg consensus 6.20, NDF 6.37)."