Encouraging data points to stabilization of China's economy but challenges ranging from tepid private investment to sluggish global economy suggest a strong recovery is unlikely.
China's industrial output remained steady in May, and retail sales were also robust. Property activity moderated but was still strong. "The economy is holding steady thanks to pro-growth policies and it [will hopefully] pick up in the second and third quarters," said Jing Ulrich, managing director and vice chairman of Asia Pacific at J.P. Morgan Chase.
Fiscal policies will likely maintain strong while monetary policies will gradually become neutral, she said, adding that she predicted the central bank would cut interest rates once this year.
Likewise, UBS economist Wang Tao expects economic activity to hover around its current pace for another few months, with firmer growth in the April-June period on a sequential basis. Wang maintained her forecast for full year GDP growth at 6.6 percent.
Despite the warming signs, Ulrich does not expect a strong rebound due to the sluggish global economic recovery. "The U.S. economy markedly slowed in the second quarter and its employment data also fell short of market expectations, which will weigh on China's exports and impact Chinese companies' presence overseas," Ulrich said.
Besides, growth of private investment, which accounted for around two thirds of the country's total investment, slowed to 3.9 percent in the January-May period from an already weak 5.2 percent in the first four months.
China should count on the service sector and high-tech manufacturing for sustainable growth momentum under the current structural slowdown, Ulrich said. The service sector has become one of the most potent economic drivers, accounting for 56.9 percent of the country's GDP in the first quarter, with rapid growth in the Internet, entertainment and sports sectors.
China's GDP expanded 6.7 percent year on year in the first quarter, the slowest growth since the global financial crisis in early 2009.
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