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By Brian Jackson, China Economist, IHS Markit

Key Points:

  • Chinese industrial production growth was unchanged in May at 6.5%. Output expanded by the same 6.9% in manufacturing alone, with no change in the distribution of contributions from heavy and light manufacturing as calculated by IHS Markit.
  • Fixed-asset investment growth slowed to 8.6% growth in May, from 8.9% in April. The slowdown was overwhelmingly due to slower investment in services and marginally weaker investment in agriculture, with industrial and construction sector investment improved slightly.
  • China’s housing sector activity worsened in May. Most notably, floor space completed grew by only 3.4%, down from 8.0% in April; this ties most closely to real growth rates in the construction sector portion of the secondary sector, and is down even more significantly when compared to the 13.7% growth in the first quarter.
  • China’s retail sales growth was unchanged at 10.7% in May. The distribution of retail growth shifted slightly in favour of medicine and food, and slightly away from communication appliances, petroleum products, and building materials, although overall was not markedly changed in nominal terms. In real terms, retail sales remains one bright spot in the second quarter, having accelerated by about one percentage point compared to growth rates in the first quarter.
  • A monthly index of service sector growth expanded 8.1% in May, unchanged from April. That index reported 8.3% growth during the first quarter of the year. That scale of deceleration in overall services indicates a GDP deceleration of nearly 0.2 percentage points, all else equal, although notably this index is relatively new and thus it is not entirely clear how the monthly volatility within the smaller sample correlates to changes in the quarter-to-quarter growth rate; nonetheless, a slowdown is indicated.

Outlook & Implications:

While changes in the May data are relatively benign, they still indicate slower GDP growth in the second quarter. Headline indices for industry and services are both growing well below their pace of expansion in the first quarter. Construction and investment sector data is also pointing to deceleration and stability. Retail sector activity is the only genuine bright spot, although it is notable that retail sector data is included within the services activity index, indicating its improvement in real terms has not been enough to outweigh decelerations in other Chinese services.

Overall, growth continues to decelerate, and continues to dominated by state-led activity on the investment side. This trend is expected to persist through 2017, a year where officials will utilize fiscal stimulus via SOEs (state-owned enterprises) and government to prop up growth before a sensitive political transition at year-end, which is likely to result in a mild correction in 2018 as stimulus wanes and housing activity experiences a deepening cyclical correction. Authorities are successfully delaying that correction by one year, but they will not avoid it entirely.

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