As megacities like Shanghai and Beijing grope toward full reopening as fiscal stimulus begins to kick in, China has passed the worst of its spring slump. However, this does not imply a tremendous third-quarter comeback.
To begin with, the good news: Two crucial signals of strength were found in May economic data released on Wednesday, which could help limit the damage caused by Shanghai’s recent shutdown. First, infrastructure investment increased by 7.3 percent year over year in May, according to HSBC, more than double the modest 2.8 percent increase in April.
Bank of China
This corresponds to statistics from Wind, which show a significant increase in local government bond issuance in the last six weeks; infrastructure investment could pick up even more in June.
Second, increasing exports and auto output helped industrial production surprise on the upside. Auto sales fell by 12.6 percent year over year in May, down from 47.6 percent in April. Given that the government recently announced a significant tax decrease on auto sales, which will take effect this month, June numbers are expected to continue to improve.
As reported by WSJ, Even if more snags in the reopening are averted, there are still numerous significant issues that indicate the third-quarter growth rebound will likely be mediocre.
First, despite Premier Li Keqiang and other top officials’ clarion demand to assist growth, the People’s Bank of China is still treading carefully. With today’s data release, the central bank defied expert predictions for a decrease in its key medium-term lending facility rate.
Concerns about additional yuan weakness, which might lead to significant capital outflows during a Fed rate hike cycle, continue to bind the central bank’s hands. Short rates and corporate bond yields fell substantially after the PBOC announced a decrease in banks’ reserve requirements in mid-April, but so did the yuan, which fell almost 6% against the dollar from mid-April to mid-May.
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