China slowdown spooks markets as Premier Li Keqiang warns of 'severe challenges' ahead

Analysts expect central bank to ease monetary policy to boost growth

Premier Li Keqiang said called for flexibility on growth target of 7.5% for the world's second largest economy (Getty Images)

Chinese Premier Li Keqiang has warned that the world's second largest economy is facing "severe challenges" fuelling speculation the central bank will soon intervene to kickstart growth.

The Chinese economy received a double blow after weak data for January and February signalled the slowest start to the year for factory production since 2009 and the most sluggish advance in retail sales in a decade.

Industrial output rose 8.6 per cent in the first two months of the year, while retail sales climbed 11.8 per cent, according to official figures, including the period covering the Chinese Lunar year.

Economists polled by Reuters had forecast industrial output to rise 9.5 per cent and retail sales to increase 13.5 per cent.

Fixed-asset investment, an important driver of economic activity, climbed 17.9 per cent in January and February from the same period in 2013, also falling short of analysts' estimates calling for a 19.4 per cent increase.

The Chinese government has set a target for GDP growth of 7.5 per cent for 2014. However, the Chinese Premier told the National People's Congress (NPC) there could some degree of flexibility on that target.

Societe Generale's Wei Yao said: "First-quarter GDP growth falling below 7.5 per cent is pretty much certain". He expects the central bank to relax its monetary policy to support growth.

Any sign of a slowdown in China dents industrial metal prices and spells bad news for raw materials stocks. On Monday, the London Metal Exchange’s three-month copper contract fell as much as 4 per cent to its lowest level since last June, following a dramatic 18.1 per cent year on year fall in Chinese exports.