Domestic real-sector data is mixed in May

Latest reading: Industrial output expanded 5.8% in year-on-year terms in May, below April’s 6.1% reading and undershooting market expectations. Softer manufacturing growth was behind the slowdown. Moreover, in January–May, fixed-asset investment was weaker than markets expected. The trade war with the U.S. could have negatively impacted these indicators. In contrast, retail sales growth beat expectations at 6.4% year on year, boosted by the government’s trade-in program. Finally, housing indicators were soft, with home prices and sales plus real estate construction activity all falling notably so far this year in annual terms.

Panelist insight: On the property market, ING’s Lynn Song said: “After several months of relatively encouraging data, where the pace of price declines slowed and more cities saw price stabilisation, we’re seeing faster price declines with fewer cities experiencing upswings. This suggests there’s a risk that the property market slides backwards again. It’s possible that activity may have stalled amid higher levels of trade-war uncertainty. While the 10bp People’s Bank of China rate cut in May will help on the margins, more support will likely be needed as positive momentum looks to have stalled. Stabilising housing prices remains a very important goal. Property represents 60-70% of China's household balance sheets.” On current and future economic conditions, Nomura analysts said: “The increase in retail sales and decline in FAI underscore the shift in Beijing’s policy focus from investment to consumption. However, we expect the boost from the trade-in program to fade in H2, especially given the high base. Retail sales growth of catering services and tobacco & liquor increased to 5.9% y-o-y and 11.2%, respectively, in May from 5.2% and 4.0% in April. However, Beijing’s latest austerity rule announced in May – which includes a sweeping ban on alcohol and tobacco at official receptions – is likely to have a more substantial impact on retail sales in coming months. Payback from the frontloading of exports might come after the 90-day truce period ends. The property sector is still contracting, with a high risk of the economy suffering from a double whammy.”

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