China NBS PMI:Softer growth momentum,but a broader recovery

The official NBS China Manufacturing PMI came in better than expected, at 51.2and unchanged from the April reading. The underlying growth momentum hasindeed been softening since Q1, but at a less rapid pace than the market hadexpected. The re-stocking cycle is clearly shifting into a slower gear, with inputprice inflation cooling. Nonetheless, both domestic and external demand looked tobe past the worst (late 2015 to early 2016), which is consistent with our view thatthe manufacturing sector should continue to see a gradual recovery in the rest of2017. The non-manufacturing PMI showed stronger growth over the month, asretail, tourism and logistic sectors continued to outperform. Activity in theproperty sector eased for the third consecutive month, pointing to a likelyslowdown in investment growth in 2H 2017. With growing recovering, policymakers are tightening at the margin through ‘financial de-leveraging’ policies. Buta balance needs to be struck between regulating the financial system and ensuringa stable policy backdrop to sustain the growth recovery.