China industrial production growth dips 9.5%

GDP growth might slow around 7.4-7.5% in 3Q if IP does not pick up.

According to Bank of America Merrill Lynch, contrary to market expectations, industrial production growth (IP, in real terms) slowed to 9.2% yoy in July from 9.5% in June. Both in nominal terms, fixed asset investment (FAI) growth was unchanged at 20.4% yoy in Jan-July from 1H12, while retail sales growth dropped to 13.1% yoy in July from 13.7% in June.

Here's more from BofAML:

Implications of the lower-than-expected IP growth GDP growth in 3Q could be below current market consensus at 7.8% yoy if there is no strong recovery in Aug and Sep. If IP growth remains around 9.2% in Aug and Sep, GDP growth might be around 7.4-7.5% in 3Q. We see rising downside risk to our 8.0% GDP growth forecast for 3Q and 8.0% annual GDP growth forecast for 2012.

Together with falling inflation (yoy CPI and PPI inflation at 1.8% and -2.9% respectively in July), we see more room for policy easing and stimulus. We expect an imminent 50bp RRR cut (a total of three 50bp RRR cuts before year end) and two 25bp symmetric interest rate cuts in the rest of 2012.

Markets are surely disappointed by the 9.2% IP growth in July, but the negative impact of the lower-than-expected IP growth reading could be limited as investors might expect more policy easing going forward.