China Activity Data (May 2017)

May activity data came in largely in line with expectations, with FAI slightly belowbut IP growth marginally above consensus forecasts. The structure of theeconomy continues to improve. Both housing and infrastructure investmentslowed as expected. Tighter financial regulations and property market policiesmay put more pressures on these two sectors in the coming months. But theprivate business-dominated manufacturing industry recovered further. Privatesector FAI growth also rose to 6.7% y-o-y, from 5.3% in April. A similar divergencecan be observed in retail sales, as property-related sales (such as decorationmaterials) moderated but restaurant and household durable goods sales improved.

    Signs of further strength in the manufacturing recovery should help to dispelworries that the economy is heading to a 2015-like slowdown. Both consensus andour expectations are for overall growth momentum to ease further, especially incredit-sensitive sectors such as housing. But manufacturing recovery should helpcushion the slowdown. Its private-sector driven nature also bodes well for thesustainability as well as efficiency improvement in the economy.