Weak Chinese activity data point to further downside risk to growth

Chinese economic data over the weekend showed a sharp decline in the Foreign Direct Investment during the month of May. China’s foreign direct investment (FDI) fell one percent in May from a year earlier to 56.77 billion yuan, or $8.89 billion, the Commerce Ministry said on Sunday. This compared to a six percent y/y gain in April, following a 7.8 percent y/y rise in March.

China’s monetary easing was less aggressive in the past two months as authorities tried to rein-in overheated property markets. And the sharp slowdown in investment growth could be attributed to a less proactive fiscal policy.

Other data releases showed industrial production grew 6.0 percent in May, unchanged from last month and in line with market expectations, as the steel mills re-fired up after the steel prices rebounded in the past few months. Retail sales remained stable at 10 percent y/y in May, somewhat inconsistent with the upbeat passenger car sales.

“Today’s data point to further downside risk to growth, and we think that Q2 growth is likely to hit 6.5 percent, from 6.7 percent in the first quarter. As economic growth is still under pressure, we believe that overall policy tone will remain accommodative. We even see rising odds of RRR cut, or even a policy rate cut, before the end of Q2,” adds Commerzbank.