China: Disappointing data, more easing

China Macro: May activity data bring more disappointment

China’s monthly activity data for May published this morning generally came in weaker than expected, although we should add that the swings in annual growth rates are heavily impacted by base effects from the broad Omicron lockdown last year. Annual growth of retail sales slowed to 12.7% yoy (April: 18.4%, consensus: 13.7%), but picked up in monthly terms, to 0.42% mom (s.a.), from a downwardly revised 0.2% in April. Growth of residential property sales was stable, at around 12% yoy. Industrial production cooled to 3.5% yoy as expected (April: 5.6%), but also improved on a monthly basis, to +0.6% mom (from -0.3% in April). Fixed investment slowed to 4.0% yoy in January-May (Jan-April: 4.7%, consensus: 4.4%), with a further weakening of property investment (-7.2% yoy ytd). The unemployment rate was stable at 5.2%, although youth unemployment rose to a new high of 20.8%. Previously, official PMIs, exports and lending data for May also came in weaker than expected, although Caixin’s PMIs and import data surprised to the upside. All in all, Bloomberg’s monthly GDP estimate slowed to 6.3% yoy in May (April: 8.0%). We still expect annual growth of real GDP to surge in Q2 reflecting the weak base from last year, but sequential growth to slow sharply compared to the ‘reopening bonus’ pace of 2.2% qoq seen in Q1.

Piecemeal monetary easing continues, more targeted fiscal support likely

Meanwhile, the PBoC continues with piecemeal monetary easing to support the recovery, in line with our expectations (also see our latest China Monthly update). Last week, the PBoC asked banks to cut their deposit rates by up to 15bps. That was already a signal that mini rate cuts were forthcoming, with the cut in deposit rates needed to preserve bank’s net interest margins. On Tuesday, the PBoC lowered the 7-day reverse repo rate by 10bp, to 1.9%, as well as the rates on its standing facility. Today, the policy rate on its medium-term lending facility was also cut by 10bp, to 2.65%. while the PBoC stepped up its lending volume through this facility. Following these moves, we expect similar cuts in the 1- and 5-year loan prime rates coming Tuesday. Although all these policy rate cuts, the first ones since August 2022, are not substantial in itself, they signal the new government team’s pro-activeness and preparedness to step up support. Next to further piecemeal monetary easing steps, such as the further lowering of bank reserve requirements, we expect Beijing to come with more targeted fiscal support aimed at weak spots including the property sector. The State Council is reported to currently reflect on a support package, with possibly measures such as stepping up policy lending, raising/frontloading local government bond quota, and other specific measures to stabilise the property sector and support domestic demand.