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The economy is still recovering from the lockdowns of April and May, and that recovery likely still has some room to run. But it feels like downside risks are now growing again. This week's export and monetary data will be useful in evaluating just how large those risks are.
June's data still don't show much inflation in China. And, outside of food prices, there's not much sign of that being about to change.
The themes for China cycle are unchanged: recovery; not huge stimulus; an ongoing commitment to zero covid; and a lack of underlying inflationary pressure. These themes need to be challenged before there are bigger shifts in China's financial markets.
The PMIs rose in June, but the neither the size of the improvement nor the details of the surveys suggest that the economic recovery out of Covid will be particularly strong.
Not only were the headlines in the PBC's quarterly sentiment surveys weak, but so were the underlying indicators that usually lead the overall economy. With little resilience in these indicators, the pace of recovery from the covid lockdowns looks likely to remain modest.
Our FCI remains accommodative. That, depressed activity, the fall in covid cases and a corporate sector that is somewhat of an even keel should ensure modest recovery. However, without a clearer policy push from the government, a real surge in growth in 2H feels unlikely.
That industrial profits fell in May isn't a surprise. But the fall was fairly modest, and revenue remains on an upwards trend, with corporate earnings likely being helped by the strength of commodity prices in recent months.
Covid numbers have fallen, which is good news for the cycle, given the government continues to make clear that zero covid is a pre-condition for everything else. Economic activity is recovering, but so far, the lift seems modest.
Given everything else we already knew about May, it wasn't surprising that property prices were also weak last month. However, there needs to be a turnaround soon to think the correction is just cyclical rather than structural.
The May activity data release didn't surprise. Most of the data were better than April, but not all. GDP may have grown YoY in May, but only just. Overall, the economy is recovering, but is still weak.
China remains on course for modest recovery. Covid-19 remains a downside risk, while the upside is muted without clearer policy support.
Just as the overall sentiment has passed through peak pessimism, so the credit cycle has lifted from the trough. But the credit data in May were mixed, and absent the emergence of a significant source of demand, the upside for credit is likely limited.
Foreign trade growth surprised to the upside in May. But the trend is still down, with export growth likely slowing to zero in the next few months.
Overall inflation moderated in May, and the leads for both PPI and core CPI continue to suggest China isn't likely to see higher inflation in the next few months.
No, it isn't only Hu Xijin who cares about growth. The government does too, albeit these days more because of the debt burden and politics than employment. But policy stimulus is underwhelming, seemingly because of a logjam in thinking: how to get more investment growth, but no more debt.
There's been more policy loosening, but it remains incremental. Upside risks to activity do exist as FCI continues to lift, but it is difficult as yet to get too excited about the outlook.
The May PMIs are backward-looking; clearly the bigger story right now is the easing of covid lockdowns. But today's surveys are still useful, suggesting there are some important headwinds to how fast a recovery there can be from here.
The first end-of-month sentiment survey for May was even weaker than in April. That suggests the economy is still contracting. Against that, it was mildly encouraging that prices also weakened, inventories seem to be low, and financing availability didn't deteriorate too much.
Covid numbers finally show real signs of turning, clearing the way for a cyclical recovery in June. But the policy response doesn't yet feel strong enough to add much to the upside.
Reading the western media, and it seems the strongest market in China right now is for doom and gloom. Which is striking, as the short-term cycle is likely close to a trough, while there are reasons to think the longer-term outlook isn't as bad as the spate of the-end-is-nigh headlines suggests.
The Covid-19 situation has improved, but not by enough to declare the all-clear. Policy has eased, but not by enough to ensure recovery when lockdowns do end. There's more debate about giving help to households, but further loosening still seems likely to focus on companies and investment.
The 5-year Loan Prime Rate was cut 15pb today. That was bigger than market expectations, but property equities rose only modestly. That is likely a reflection of how weak activity currently is, and thus how much work still needs to be done to turn things around.
As was seen with other indicators for the property market in April, the tentative recovery in housing prices of the last few months also lost momentum last month.
Economic activity came to a halt in April, and given the government's priorities, can't restart until lockdowns end. The PBC has offered more policy support, but given the hole the economy is in, not enough yet.
Chinese GDP is almost certainly contracting once again. The quality of the data makes it difficult to say how deep the fall is, but by my rough estimate, RGDP declined by perhaps 2-3% YoY in April.