Chinese data on urban investment growth in May surprised as it moved downwards. Fixed urban investment growth fell to 9.6 percent y/y year-to-date (year-to-date) from 10.5 percent y/y (year-to-date) in April. While still quite high, the reading was the lowest growth rate in 16 years and contradicted with other signs of a moderate recovery.

After a disappointing turnout last month, Chinese industrial output and retail sales data came in broadly in line with expectations. Factory output at manufacturing, mining, construction and utilities companies rose 6 percent from a year earlier following a similar advance in April. Retail sales, a measure of both private and government purchasing, rose 10 percent in May from a year earlier.

Government is trying to recalibrate the economy towards consumer demand in order to achieve a 6.5 percent growth target in 2017, down from 6.9 percent last year. But sky-high government and corporate debt levels and real estate glut loom on the horizon and threaten the economy's foundations.

"Our base case is still for a continued cyclical recovery over the coming quarters driven by the construction sector and exports. However, the investment data clearly underlines that the improvement is still fragile and that structural headwinds from overcapacity and too much leverage in certain sectors are weighing on the medium-term outlook," said Danske Bank in a report.