China's economy slowed in May, bolstering the case for extra support

A worker wearing a face mask works on a production line manufacturing bicycle steel rim at a factory, as the country is hit by the novel coronavirus outbreak, in Hangzhou, Zhejiang province, China March 2, 2020. China Daily via REUTERS/File Photo

China's economy faltered in May, with industrial output and retail sales growth falling short of expectations, adding to expectations that Beijing will need to do more to stabilize the fragile post-pandemic recovery.

Earlier this year's economic recovery lost steam in the second quarter, prompting China's central bank to reduce key interest rates this week, with further reductions anticipated.

Industrial output increased 3.5% year-over-year in May, the National Bureau of Statistics (NBS) reported on Thursday, slower than April's 5.6% growth and slightly below the 3.6% increase anticipated by analysts in a Reuters poll, as manufacturers struggled with sluggish domestic and international demand.

Retail sales, a key consumer confidence indicator, increased 12.7%, missing expectations of 13.6% growth and decelerating from April's 18.4% growth.

The president of Pinpoint Asset Management, Zhiwei Zhang, stated that the economic momentum is diminishing based on all available data.

Data from factory surveys and trade to loan growth and home sales indicate that the world's second-largest economy is weakening. According to NBS data, crude steel production continued its year-over-year and month-over-month declines in May, while daily coal production declined from April.

In light of last year's very poor performance, when many cities were under strict COVID lockdowns, analysts had anticipated a sharper uptick in the current data stream.

The data bolsters the case for additional stimulus as policymakers confront deflationary risks, rising local government debts, record youth unemployment, and weakening global demand.

"Inadequate domestic demand and sluggish external demand could halt momentum in the coming months, leaving China with a more gradual U-shaped recovery trajectory on its month-to-month growth path," said Bruce Pang, chief economist at Jones Lang LaSalle.

According to Pang, the first stage would be introducing stimuli through broad policy easing. However, stabilizing a sluggish economic recovery may take two to three years.

Central Bank Easing

China's central bank lowered the interest rate on its one-year medium-term lending facility on Thursday for the first time in ten months, paving the way for cuts in the benchmark loan prime rates (LPR) the following week.

The benchmark CSI 300 gained 0.6% in early trading following the rate cut, while the Hang Seng Index in Hong Kong rose 1.2%. The yuan dropped to a new six-month low.

The markets are also betting on additional stimulus, including measures aimed at the floundering real estate industry, which was once a vital growth driver.

The head of China for Capital Economics, Julian Evans-Pritchard, stated that while the central bank's easing won't make much of a difference, it exposes "growing concerns among officials about the health of China's recovery."

He added that the second quarter is becoming weaker than anticipated and that additional policy support is likely required to prevent a resumption of the economic downturn.

Due to the low base effect from the previous year, Fu Linghui, a spokesperson for the National Bureau of Statistics, stated at a press briefing that the growth rate in the second quarter was anticipated to increase.

However, he cautioned that the recovery confronts "a complex and bleak international environment, a sluggish global economic recovery," and "insufficient domestic demand."

Last week, Yi Gang, the governor of the PBOC, pledged that China would implement counter-cyclical policy adjustments to stabilize the economy.

In May, property investment fell at the quickest rate since at least 2001, falling 21.5% year-over-year, while the price growth of new homes slowed.

This week, analysts at Goldman Sachs predicted that China's property market, historically a significant contributor to economic growth, will experience "persistent weakness" for years.

Private fixed-asset investment decreased by 0.1% in the first five months, in stark contrast to the 8.4% increase in state investment, indicating low business confidence.

The adolescent unemployment rate reached an all-time high of 20.8% as labor market problems persisted. In May, the national survey-based unemployment rate remained at 5.2%.

Despite a sluggish economy, policymakers in Beijing have been hesitant to extend more aggressive stimulus while other global central banks raise interest rates to combat inflation, which could risk further capital outflows.

Recently, the nation's largest banks lowered their deposit rates to alleviate pressure on profit margins and encourage depositors to spend more.

Publish : 2023-06-15 11:12:00

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