China: Activity likely resilient in May on tariff rollback – Standard Chartered

Official manufacturing PMI edged up to 49.5 in May on improved new orders and production. Real activity and export growth likely remained resilient on 2Y CAGR basis, indicating stable momentum. Deflationary pressure may have intensified; monetary easing likely lifted money and credit growth, Standard Chartered's economists report.

Deflation likely is going to worsen

"The official manufacturing PMI edged up to 49.5 in May from 49 in April, benefiting from the US-China tariff truce reached in mid-May. New orders and new export orders PMIs rebounded, albeit staying in contractionary territory. The production PMI rebounded to 50.7, indicating m/m expansion. Overall services activity growth remained soft and construction activity slowed due to a still-weak real estate sector."

"While headline export growth may have slowed due to a high base, the 2Y CAGR likely accelerated on a recovery in trade flows to the US. We expect imports to have returned to positive growth. Industrial production (IP) growth may have remained resilient, rising to 6.4% y/y in May. We estimate that the 2Y CAGR for retail sales accelerated due to the holiday boost and consumer goods trade-in campaign. Fixed asset investment (FAI) growth likely remained stable, supported by solid infrastructure investment, while real estate investment may have continued to contract." 

"CPI deflation likely worsened 0.1ppt to -0.2% y/y in May on a m/m decline in food, services and fuel prices. PPI deflation may have edged up to -3.3% y/y on falling petrol-related and metals prices as commodity prices fell. We expect M2 and credit growth to have picked up in May partly on the PBoC’s policy rate and reserve requirement ratio (RRR) cuts. Government bond financing likely expanded significantly."