China May Data Preview: CPI Drop Leaves Door Open For More Easing

China is scheduled to report May inflation, industrial production, retail sales, and fixed-asset investment on Saturday. Trade data are due Sunday. M2 money-supply and new-loans data are due June 11-15.

The Wall Street consensus was for China's May data to recover marginally from a surprisingly weak April, but still on course to deliver the country's weakest quarterly growth in three years.

Beijing kicked off a new round of monetary loosening in the last third of May, which probably had little impact on spending and activity for the month as a whole, economists say. However, cooling inflationary pressure should pave the way for more, if not bolder, easing efforts to complement the Peoples' Bank of China moves announced this week.

Market[s] should not be surprised to see weaker growth data and an even faster drop of inflation in May's set of data releases, Qu Hongbin, co-head of Asia Economics at HSBC Holdings PLC, said in a note.

May Data Outlook

Economists surveyed by Reuters project that China would hand in its weakest quarter of growth in three years in the second quarter at 7.9 percent. That would also mark the sixth consecutive quarter of slower growth.

In early March, China cut its economic growth target to an eight-year low of 7.5 percent from an 8 percent goal in place since 2005. Economists currently look for the world's second-largest economy to expand at an 8.2-percent-pace -- the weakest showing in 13 years.

That said, Karl Schamotta, senior market strategist for Western Union Business Solutions, noted that China's cup may have runneth over with irrational exuberance for far too long, but it isn't ready to break just yet. 

Consumer Price Index. The CPI probably eased only slightly in May, but economists are expecting larger falls to come in the next couple of months. This should help to convince policymakers that inflation is not a constraint on further policy easing.

The CPI is expected to have risen 3.2 percent in May from a year earlier, down from April's 3.4 percent and safely below the official 4 percent target for this year. Qinwei Wang, economist at Capital Economics in London, believes there's a good chance that CPI will decline at a faster pace in June and July to as low as 2 percent.

The weekly data showed that food prices have continued to drop over the past few weeks, which is normal at this time of year. Once seasonal factors are taken into account, food prices have been roughly flat. Nonfood price inflation has picked up slightly, but still remains at relatively low levels.

Meanwhile, global oil prices have fallen sharply this quarter, which has prompted Beijing to reduce the retail prices of gasoline by around 6 percent, as announced Friday. It was the second reduction this year and the largest since late 2008.

Producer Price Index. The PPI, a main gauge of inflation at the wholesale level, is expected to fall 1.1 percent in May from a year earlier, the third straight month of decline. The index was down 0.7 percent in April.

Industrial Production. Factory output probably rose in May by 9.9 percent from a year earlier, recovering from a 34-month low of 9.3 percent in April. However, this slight improvement would still place China's factory activity in the neighborhood of a three-year low.

Trade. A slight pickup in export growth is forecast for May. Economists are calling for a 6.8 percent rise, which would be a big step forward from April's paltry 4.9 percent, but still well below the official 10 percent expansion targeted for this year. Exports to the troubled European region, where activity shrank 2.4 percent in April, would be once again in focus. Import growth probably advanced by 5 percent in May, compared with the year-ago period. While better than the 0.3 percent increase seen in April, that would still come in well below the 10 percent target. China's trade surplus should continue to narrow to 16.15 billion yuan ($2.54 billion) in May, from 18.40 billion in April.

Retail Spending. Consensus calls for China's retail sales, the main gauge of consumer spending in the country, to rise 14.3 percent from the year-ago period -- a slight improvement from April's print of a 14 percent increase. China's finance ministry launched a plan Monday to subsidize energy-saving appliances as part of the government's efforts to shift toward domestic consumption and pick up the slack coming from slower European demand.

Fixed-Asset Investment. The National Development and Reform Commission, China's top economic planning agency, said Friday it will provide subsidies and discount loans to encourage private investment, which accounts for more than 60 percent of China's total fixed-asset investment. Growth in fixed-asset investment, which accounted for 54 percent of China's gross domestic product last year, slowed to 20.2 percent in the first four months of this year.

Bank Lending. China's banks made new loans worth nearly 800 billion yuan in May, the Economic Information Daily reported Wednesday, citing unnamed authoritative sources. Economists forecast new lending will likely pick up to 720 billion yuan in May from the disappointing 682 billion yuan recorded in April.

Beijing Will Go All Out To Support Growth

After a two-year tightening campaign to rein in inflation, the People's Bank of China delivered twin surprises on interest rates Thursday: loosening banks' lending and deposit rates and cutting borrowing costs for the first time since 2008.

While the impact is likely to be limited, it does show Beijing is willing to do whatever it takes to support growth and to boost confidence, HSBC's Qu said in a note. Get ready for more decisive easing.

The second quarter will be the cyclical trough for China's GDP, Qu estimated, and a modest recovery will take growth back to more than 8.5 percent in second half of this year once stimulus starts filtering through.

Wang, of Capital Economics, echoed the view that there are more rate cuts ahead. He expected another 25-basis-point cut in the benchmark lending and deposit rates, along with three more cuts in the banks' reserve requirement ratio (50 basis points for each) by the end of this year.

That said, the scale of the stimulus this year is likely to be smaller than in 2009 and should not lift price pressures much, Wang said in a note.

While many harbor doubts about the wisdom of more credit-fueled stimulus, Wang pointed to the Chinese government's overriding objective at the moment -- which is to ensure that the economy is not too fragile in the final months before the once-in-a-decade leadership transition later this year.