Analysts: China slowdown may have bottomed out, economy is gaining momentum

Fresh Chinese data on retail sales and industrial production matched economists' expectations giving cues that the world's second largest economy may have bottomed out and will soon start to gain momentum.

Retail sales rose 10.1 percent in May from a year earlier, slightly stronger than April's 10 percent rise despite recent signs of weak domestic demand from worse-than-expected import and inflation figures.

Industrial output for May also climbed gaining 6.1 percent from a year earlier - slightly stronger than the 5.9 percent increase in April.

However, fixed asset investment for the January-to-May period rose 11.4 percent from the year-earlier period, below the estimates of 12.0 percent, suggesting the country's economy is continuing to slow.

Loius Kuijs, a China economist at RBS, commented that despite the signs that the momentum has bottomed out, the data is still not very strong suggesting there will be no swift recovery. Especially, it is vivid with regard to investment, which was weak by China's standards, with weak real estate and corporate investment offset by the authorities' efforts to support infrastructure spending.

The positive side is "the solid growth of consumption, where the fact that we still have a solid service sector means we still have good employment creation," Kuijs said. "That's cushioning pressure in the industrial sphere."

Analysts from ANZ, however, were not that optimistic.

"Today's activity data, plus the soft external trade figures released earlier, suggest that the gross domestic product (GDP) growth could miss 7.0 percent in the second quarter," ANZ said in a note Thursday.

"It appears that the monetary easing so far has had limited impact on improving growth momentum."

A series of recent data was below analysts' expectations. May China's imports plunged 17.9 percent - more than the 10.7 percent drop forecast in a Reuters poll, data released Monday showed.

China's consumer price inflation (CPI) climbed 1.2 percent in May from the year-earlier period, slightly below the 1.3 percent forecast in a Reuters poll and below the 1.5 percent rise in April.

The country's economic growth slowed to 7.0 percent in the first quarter - its slowest in six years, expanding 7.4 percent in 2014, its slowest pace in 24 years and undershooting the government's target for the first time since 1998.

On Wednesday China's central bank lowered its inflation forecast for 2015, while predicting a pick up in the world's second-biggest economy during the next six months thanks to more stable home prices and firmer foreign demand, says Reuters.

Economists at the central bank posted on its website that they forecast annual inflation of just 1.4 percent in 2015, lowering their estimate from 2.2 percent earlier.

They specified that easier monetary policy conditions as a result of China cutting interest rates three times since November were expected to support growth in coming months.

Kevin Lai, an economist at Daiwa in Hong Kong, said to Reuters that he finds PBOC economists too optimistic as they say about recovery within the next six month. He noted that deflationary pressure will be stronger.

He also said that falling producer prices and weakening consumer inflation will lift borrowing costs in real terms, further squeezing companies already buffeted by weak orders.