Weak activity data signals Chinese economy under pressure; another round of easing likely from PBoC

China’s weaker than expected activity data for May released on Monday underpins the view that the country's economic growth is under pressure. In the second quarter of 2015, the financial sector had considerably contributed to the growth, thanks to the huge stock market rally in mid-2015. However, this year, the financial industry is expected to be a drag since the volume of transaction in the stock market has fallen by over 60 percent after the stock rout.

Given this backdrop, the Chinese economy is expected to further slow down to around 6.5 percent in the second quarter, as compared to the 6.7 percent growth recorded in the fist quarter of 2016, said Commerzbank in a research report on Monday. As the global economic rebound is not strong, the Chinese economy is likely to further slow below 6.5 percent in the second half of 2016.

According to China’s official statistics office, the nation’s industrial production was flat at 6 percent y/y last month, with both retail sales and fixed asset investment surprising markets on the downside. China’s fixed asset investment, which is a vital measure of infrastructure spending, grew 9.6 percent in the January to May period, a new record low.

“We think the monthly macro data confirmed the trend the PMIs pointed to, that the explosion in bank lending in the first quarter if 2016 helped little in jump-starting investment momentum. Despite the excitement in the futures market, final demand remained weak, as the local governments and SOEs were paralyzed by the anti-corruption campaign and salary cuts," Dong Tao, Credit Suisse's Managing Director and Chief Economist for non-Japan Asia told FxWirePro.

Meanwhile, fixed asset investment in the private sector continued to decline. It grew just 3.9 percent in the first five months of this year, as compared to its earlier reading of 5.2 percent. The decline is mainly due to overcapacity persisting in several sectors.

"An even bigger concern is the sharp fall in private sector investment growth. The overcapacity issue remains severe while production costs continue to surge. The manufacturing sector is broadly profit-less, while most high value-added service sectors are monopolized by SOEs. The pace of private investment cooling down is alarming to us. China may need one more round of stimulus, likely ahead of the G20 summit in September. What China really needs is SOE (state-owned enterprises) reforms, in our view, which showed little progress over the past year," Dong Tao added.

While a weakening bias in CNY continues to be there due to subdued outlook of growth and capital outflows. The PBoC (People's Bank of China) is likely to keep intervening in the FX market when it's imperative. However, a “managed depreciation” in the Chinese currency is a baseline scenario, noted Commerzbank. It sees USD/CNY at 6.65 by the end of this year.