China May Data Wrap: A Mixed Bag Of Results Calls For More Stimulus

The overall data set was stronger than what many were speculating at the end of last week, when a surprise interest rate cut by China's central bank stoked fears that the May data would be disastrous, especially given that the memory is still fresh about the exceptionally weak April showing.

That said, many May indicators were still undoubtedly sluggish. Retail sales rose by the least in almost six years, fixed-asset investment slowed, and industrial output grew at a pace well below its historical average.

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.

To combat the slowdown, Beijing on June 7 announced the first interest rate reduction in more than three years to spur demand.

Looking on the bright side, inflation receded to 3 percent in May, the lowest reading in two years and below the government's 2012 target of 4 percent for the fourth month. This will give authorities quite some room to use monetary and fiscal tools to support the economy.

Moreover, the strong trade data offered a huge surprise, pointing to resilient international and domestic demand. Meanwhile, higher-than-expected bank lending figures suggest that recent easing measures are starting to work, fanning hopes that the worst is over.

With its banks now pumping out loans to willing state-owned borrowers, we expect an economic rebound to follow, Qinwei Wang, economist at Capital Economics in London, said in a note.

Yet this momentum needs to be further strengthened if China's ongoing growth slowdown is to be reversed, as the current pace of lending and money supply growth still lies below its historical average.

Sun Junwei, a Beijing-based economist with HSBC Holdings Plc, suggests market players to get ready for additional 200 basis points of required reserve ratio cuts within 2012, accompanied by accelerated fiscal easing measures, which should reinforce credit demand. Watch out for the next RRR cut in the coming weeks and a stronger rebound of lending in June, Sun said.

However, with the crisis in the eurozone far from over despite Spain's latest bailout, it is far too soon to sound the all clear.

Here's a look at how specific sectors of the Chinese economy fared in May:

Trade

Official data showed China's trade figures overshot expectations by a wide margin, as stronger shipments to the U.S. boosted exports growth and the recent easing measures lifted imports demand. Exports accelerated to a seven-month high of 15.3 percent in May from a year earlier, dwarfing April's 4.9 percent pace. Imports were up 12.7 percent, compared with April's 0.3 percent increase. China's trade surplus was $18.7 billion in May, a touch bigger than its $18.4 billion surplus in April and beating consensus expectation for a $16.3 billion reading. The key question is whether the strength of May's upbeat trade numbers can be sustained. The fragility of European demand continues to pose significant downside risks to growth.

Consumer Price Index

May's headline CPI cooled to a 23-month low of 3 percent from a year earlier. That's slower than April's 3.4 percent advance and well below market expectations of a 3.2 percent print. Food CPI dropped to 6.4 percent year-on-year in May from 7 percent year-on-year in April, mainly due to the continuous slowdown of fresh pork prices. Meanwhile, nonfood inflation fell to a 20-month low of 1.4 percent year-on-year in May, compared with 1.7 percent year-on-year in April.

Producer Price Index

PPI, a main gauge of inflation at the wholesale level, contracted sharply by 2.1 percent year-on-year in May, compared with a 1.2 percent year-on-year decline in April. The drop largely reflects a decline in gasoline prices.

Industrial Production

Industrial production growth nudged up to 9.6 percent year-on-year in May, following a sharp deceleration to a three-year low of 9.3 percent year-on-year in April. That fell short of the 9.9 percent increase economists had forecast and remains well below long-run average. The volume growth of major industrial products remained weak, but the biggest surprise came from cars production, which accelerated strongly to 18.5 percent year-on-year in May, following an increase of 10.7 percent year-on-year in April.

Retail Sales

China's retail sales growth edged down to 13.8 percent year-on-year in May, from 14.1 percent year-on-year in April and below market expectations of 14.2 percent, the National Bureau of Statistics said Saturday. Retail sales in the January through May period totaled 8.16 trillion yuan.

Fixed Asset Investment

Growth in fixed asset investment, which accounted for 54 percent of China's 2011 gross domestic product, expanded by 20.1 percent year-on-year in the first five months of 2012, compared with 20.2 percent year-on-year during the January through April period, and slightly better than the consensus expectations of 20 percent. Investment at local levels picked up in May, offsetting the small contraction of investment at the central level. Public investment also started to rebound, while private investment continued to slow.

Property Market

Real estate investment growth fell to 18.5 percent year-on-year in the first five months of this year, compared with 18.7 percent year-on-year in January through April. Land sales, which account for a large slice of investment, ticked up in May from April, though they still remained below the 2011 levels. Overall property sales totaled 1.69 trillion yuan ($265.3 billion) January through May, down 9.1 percent from a year ago. Property sales have fallen every month on a year-on-year basis since October.

Bank Lending

Chinese banks issued more loans than expected in May, with new lending surging to 793.2 billion yuan ($125 billion) -- well above April's 682 billion yuan and also topping most forecasts for a figure closer to 700 billion yuan. The pickup of mid- and long-term corporate loans was likely driven in part by the recent acceleration of investment project approvals, which, in turn, is helping to support investment growth. While broad money supply (M2) picked up to 13.2 percent year-on-year in May, compared to 12.8 percent year-on-year in April, it is still growing at a pace below its long-run historical average of around 16 percent and the People's Bank of China's target of 14 percent year-on-year for the year.