China's Economy Slows in First Quarter Due to March Weakness

China's economy slowed substantially in the first quarter, reporting four key data points overnight. All pointed to slower growth in the first quarter and specifically in March.

The data raised fears that the global economy took a downward turn in March, and that optimistic U.S. growth forecasts for the first quarter are just that: optimistic.

For the first quarter of 2013, China reported that GDP grew a mere 7.7 percent. Although the number appears strong compared to the low single digit growth of major western economies, the growth rate was much less than the 8.0 percent expected by economists. Recall that China had announced that it expected to grow an average of 8.0 percent per year over the next decade.

The slowdown in growth can be attributed to two key factors: A February slowdown that was expected as the economy effectively shut down due to the Lunar New Year Holiday; but also a protracted, unexpected slowdown that lasted into March. Recent purchasing managers' indexes had pointed to this March slowdown and the GDP data confirmed it.

Credit Suisse issued a note following the data release, saying that, "On a seasonally adjusted quarter-on-quarter basis, GDP expanded 1.6%, with an annualised growth rate of 6.6%, a step down from the 2.0%, and 8.2% [seasonally adjusted rate of] growth seen in 4Q 2012. The decline in growth momentum confirms our fear that the economy is weaker than what the market expects.

"The 7.7% growth was weak, but still within the acceptable range, especially with moderating inflation, in our view. This will be on the new administration's watch list, but probably not on the board for imminent action. Stabilising growth will be placed at the top of the four objectives: stabilising growth, preventing inflation, controlling risk and promoting structural reform. But at this moment, the new leadership is unlikely to launch a further stimulus to accelerate local government investment."

Also, China released three key data points for March that all pointed to a lower growth model than previously thought in March. Industrial production grew only 8.9 percent in March from a year ago, well below estimates of a 10.1 percent expected rise. Economists at Credit Suisse like to use industrial production as a key indicator for GDP growth and the data definitely makes them more cautious.

Further, China reported that retail sales for March grew 12.4 percent from the same period a year ago, slightly below estimates of 12.6 percent growth. The slowdown in retail sales was a significant break from the optimism over the Chinese consumer seen in last week's trade data, where import growth crushed estimates.

Lastly, China reported that Fixed Asset Investment (excluding rural areas) rose 20.9 percent vs. the 21.3 percent expected. The miss in the data is completely attributable to March, said Credit Suisse. "We estimate that the FAI for March alone rose 20.7% yoy versus 21.2% in January-February." Thus, the data shows a significant slowdown in corporate investment in March.

The economist continue by pointing out that further negative data could lead to easier monetary conditions in China. "Should growth continue to moderate towards the low end of 7%, we might see a reversal of some moderate tightening measures in the property market and shadow banking. We maintain our view of only a narrow-based growth recovery and believe that growth will be managed, close to 8.0%. Currently we forecast 8% GDP growth, but we think the forecast risk is on the downside."

Chinese shares, as measured by the Shanghai Composite Index, declined 1.12 percent overnight following the bearish news. Also, the CSI 300 Index declined 1.03 percent and is now down 5.57 percent over the last 52-weeks. Material and energy stocks were hardest hit as material stocks fell 3.19 percent and energy stocks declined 2.61 percent. The news also contributed to the weakness in commodity markets overnight.