China activity data was mostly softer than expected in May, although there were signs in the fixed asset investment, money supply and loans data that efforts to stimulate growth are starting to have some impact. Importantly, lower-than-expected inflation gives scope for further stimulus.
Some bounce back (or blip back??) in industrial production growth had been expected following the holiday-impacted April slowdown, but the bounce wasn’t as large as expected: year-on-year (yoy) growth was 9.6% in May, up from 9.3% in April but lower than the expected 9.8%. Retail sales growth slowed further to a yoy 13.8%, down from 14.1% in April.
On the positive side exports were stronger than expected with growth coming in at 15.3% for the year to May, up on the 4.9% recorded in April. As with IP the bounce back was holiday related, but it’s still a good outcome considering what’s going on in the world.
Fixed asset investment (FAI) growth fell slightly in year-to-date (ytd) terms to 20.1% in the January to May period, down from 20.2% in January to April. The small slowdown in ytd terms suggests to us a modest increase in growth in yoy terms to May (China only releases FAI data in ytd terms), reflecting recent reductions in bank reserve requirements. That’s supported by a modest tick-up in both growth in the money supply (yoy 13.2% in May, up from 12.8% in April) and loans (yoy 15.7% in May, up from 15.4% in April).
The best news of all was the drop in the annual inflation rate to 3.0% in May, down from 3.4% in April. The market consensus was for a drop to 3.2%. It was obviously in the knowledge of this data that the PBoC acted to cut benchmark lending and deposit rates by 0.25 percentage points last week. Annual rates of increase in both food and non-food (core) inflation slowed significantly.
The drop in inflation means there is room to move on both monetary and fiscal policy. Remember the recent drop in the official PMI index was partly due to a significant drop in the prices paid index. That’s a good omen for near-term inflation. In the months ahead we expect further reductions in the reserve ratio requirement, further cuts to interest rates and more fiscal announcements on infrastructure spending and consumption subsidies. That would support our view that the June quarter of this year will most likely mark the bottom of the current cycle with a modest recovery in growth over the second half of the year.