China's GDP dipped to 7.7%

Will the government tighten its monetary policy soon?

According to Bank of America Merill Lynch, China GDP growth slowed from 7.9% in 4Q12 to 7.7% YoY in 1Q13, while industrial production (IP) growth dropped from 9.9% in Jan-Feb to 8.9% YoY in March. These figures were significantly lower than consensus (8.0% for GDP and 10.1% for IP) and BofAML's more conservative forecasts (7.9% and 9.8%).

Here's more from BofAML:

Sequential GDP growth (QoQ, seasonally adjusted but not annualized) slowed from 2.0% in 4Q12 to 1.6% in 1Q13. Fixed asset investment (FAI) growth slowed slightly from 21.2% in Jan-Feb to 20.9% YoY in Jan-Mar, while retail sales growth rebounded moderately from 12.3% in Jan-Feb to 12.6% YoY in March.

Policy implications: Expect slightly more supportive policies
With the decline in GDP growth and low inflation pressure (CPI at 2.1% and PPI at -1.9% YoY in March), monetary policy stance could still support growth in 1H13 in that credit and money growth will likely remain elevated. In other words, it is too early to call for monetary tightening, in our view.

More specifically, we expect the PBoC to ensure adequate interbank liquidity and keep 7-day repo rates at 3.0-3.5% in 1H13.

Also, bank loan growth should remain around 15.0%, similar to the pace from end-2011 to end-2012, and outstanding total social financing growth could remain at 18-21% in 1H13 before slowing slightly in 2H13.

We do not expect any rate changes in 2013. Fiscal policy stance could become a bit more supportive of growth to offset the fall in lavish government spending and the avian flu impact.

Accept 1Q weakness, but may see rebound in 2Q
Markets will surely be disappointed by these poor readings, but we believe growth could rebound slightly in 2Q on regained confidence and supportive policies.

The fall in 1Q13 GDP growth was mainly driven by a slowdown in consumption growth due to the new leaders’ crackdown on lavish government spending, a pause in inventory restocking and slowing property FAI growth due to concerns on property tightening.

With alleviated fears on tightening and low inflation, we expect GDP growth to climb back to around 8.0% if avian flu can be kept under control.

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