Fresh worries over China prompt slew of downgrades

The rapid deterioration in China’s economic momentum has put focus squarely on the world’s number-two economy, with several banks sharply cutting their gross domestic product (GDP) forecasts.

Bank of America Merrill Lynch (BofAML), Barclays and Nomura lowered their growth projections for the mainland economy late Thursday, following a spate of disappointing economic data for the January-February period.

BofAML’s downgrade was among the most aggressive; it cut its first quarter GDP growth forecast to 7.3 percent from 8.0 percent, and its annual growth forecast to 7.2 percent from 7.6 percent.

Geok N. Leong | FlickrVision | Getty Images

Geok N. Leong | FlickrVision | Getty Images

Nomura revised down its first quarter growth forecast to 7.3 percent from 7.5 percent, noting that it sees downside risks to its full-year forecast of 7.4 percent.

“Given weaker-than-expected economic activity in January-February, we need to lower our GDP growth forecast for the first quarter, although we maintain our view on the trajectory growth: slowing in the first-half to a bottom in the second quarter at 7.1 percent and rebounding in the second half to 7.5 percent as we think policy will likely loosen significantly in the second quarter,” Zhiwei Zhang, chief economist at Nomura wrote in a note.

While the government maintained its official 2014 growth target at 7.5 percent, Premier Li Keqiang said there is some “flexibility” around the target during a press conference at the close of the National People’s Congress (NPC) on Thursday, seeming to indicate a willingness to tolerate slower growth.

(Read moreChinese Premier hints at tolerance for slower growth)

Whether China has truly abandoned its fixation on growth remains in question however.

Louis Kuijis, chief China economist at RBS argues that growth remains a dominant economic policy objective as underscored by the government work report submitted to the NPC last week.

Dariusz Kowalczyk, senior economist and strategist, Asia ex- Japan at Credit Agricole, meanwhile, believes the government has shifted away from targeting a specific pace of growth to focusing on employment, nationwide income gains and establishing flexible objectives.

(Read moreDr.Doom: Take the pain now or it’ll be worse later)

Nevertheless, China growth concerns have returned to the fore, weighing on Asian markets on Friday. Japan’s benchmark Nikkei 225 index declined 2.7 percent and Hong Kong’s Hang Seng index fell over 0.7 percent in early trade.

“China remains in the limelight after more data point to softness in China’s economy. Admittedly, seasonality effects are at play; but markets fear that a bigger part of the slowdown is not attributed to seasonality,” Cynthia Kalasopatan, market economist of Mizuho Bank wrote in a note on Friday.

“March data will most likely be a better gauge and we continue to feel that the fears are overdone,” she said.

Kalasopatan added that the authorities will probably implement targeted stimulus measures to support growth.

China’s central bank is said to be prepared to take its strongest action since 2012 to loosen monetary policy if economic growth slows further, by cutting the amount of cash that banks must keep as reserves, Reuters reported earlier this week.

(Read moreChina central bank ready to act if growth falters)

Nomura forecasts a 50 basis point cut in the reserve requirement ratio (RRR) in the second quarter, with another in the third quarter.

—By CNBC’s Ansuya Harjani. Follow her on Twitter @Ansuya_H

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