China: Growth fell short of expectations in May – Standard Chartered

According to analysts at Standard Chartered, China’s growth fell short of market expectations in May as industrial production (IP) growth decelerated to 5% y/y from 5.4% in April, below market expectations of 5.4%.

Key Quotes

“The longer May Day holidays weighed on production activity but boosted retail sales growth to 6.4% y/y in May in real terms from 5.1% previously. Fixed asset investment (FAI) growth moderated to 2.7% y/y in May in real terms, from 4% in April, due to slower growth in infrastructure and land investment. The labour market remains stable, with the surveyed unemployment rate unchanged at 5% in May.”

“While growth has underwhelmed in the first two months of Q2, it could pick up strongly in June as China tends to post slow growth at the beginning of a quarter and stronger growth in its final month. In other words, overall GDP growth may not have changed much from 6.4% y/y in Q1.”

“Nevertheless, uncertainty is rising due to the renewed trade conflict between the US and China. We estimate that 25% tariffs on all US imports from China could deduct 1.2ppt from China’s annual GDP growth.”

“We believe China can still achieve its GDP growth target of 6-6.5% for 2019. The proactive fiscal policy approved for 2019 should offset much of the negative impact of higher US tariffs.”

“We forecast additional cuts of 100bps to the reserve requirement ratio (RRR) or an equivalent amount of liquidity injection via targeted RRR cuts, medium-term lending facility (MLF) or targeted MLF in the rest of 2019. The PBoC is also likely to lower the MLF or the open-market-operation (OMO) rates.”