China’s official PMI data showed signs of stabilization and a pickup in aggregate demand. The PMI for May was up for a third consecutive month with the new orders index hitting a six-month high, thanks to a recovery in external demand, stabilization of consumption and the government’s growth-stabilizing policies. Recently, the government introduced measures that encourage infrastructure investment and targeted monetary easing, which lent support to fixed asset investment. The rise in the PMI was mainly driven by large and medium-sized enterprises, while the PMI for small enterprises remained weak.

The cooling property market continues to put downward pressure on economic growth. Housing area sold continued to decline and a 100-city housing price index fell MoM in May for the first time in two years. Growth in property development investment is likely to slow, which would impact local governments’ revenue from land sales and exert downward pressure on short-term economic growth.

The government stepped up its targeted fiscal and monetary easing efforts recently. The Ministry of Finance’s requirement to speed up budget implementation will help enhance fiscal spending’s boost to aggregate demand. Targeted reserve requirement ratio cuts will encourage banks to lend more in targeted areas in the short term. Overall, the government is still relying on targeted easing to support growth; we believe economic data needs to get worse in order to trigger a reserve requirement ratio cut for all banks or an interest rate cut.