Headline industrial production (IP) growth remained flat at 6% YoY in May. The headline IP growth was higher than our forecast of 5.9% YoY and in line with the market consensus of 6.0% YoY. On a sequential, seasonally adjusted basis, IP growth remained largely stable at 0.45% MoM, compared with 0.47% MoM in April. In the meantime, electricity production growth picked up to 0% YoY from -1.7% YoY in April. It is worth noting that one less working day in April 2016 has depressed headline IP growth of the month, while May IP growth was not affected by the same disadvantage. Therefore, overall production momentum may have softened moderately in May.

Nominal fixed asset investment (FAI) growth decelerated notably to 7.5% YoY in May from 10.1% YoY in April, lower than our forecast of 11.2%. Meanwhile, year-to-date FAI growth also slowed down to 9.6% YoY in May, lower than the market consensus of 10.5%. Leading indicator of FAI also weakened visibly, FAI project new starts growth decelerated to 19.1% YoY in May from 35.5% YoY in April. FAI source of fund growth also decelerated to 7.4% YoY in Jan~May from 8.1% YoY in Jan~April 2016. Sector wise:

Manufacturing investment growth took a large step down to 1.3% YoY in May from 5.3% YoY in April. Slower manufacturing FAI contributed the most to the slowdown in headline FAI, and is consistent with the weak private investment growth.

Property investment growth decelerated to 6.6% YoY in May from 10.3% YoY in April. Property new starts growth softened to 10.6% YoY in May from 25.9% YoY in April. Softer momentum in property investment and new starts may partially be driven by a higher base in May 2015 compared with April, but also reflects weaker sequential momentum after the tightening of purchase restrictions in selected cities. Meanwhile, property development source of funding growth remained largely stable at 16.8% YoY in May, the same as the growth rate for Jan~April.

Infrastructure investment growth decelerated to 19.8% YoY in May from 20.6% YoY in April, but remained at a relatively fast pace. Accommodative fiscal policy and faster local government bond swaps may continue to support relatively solid growth in infrastructure FAI.

Nominal retail sales growth edged down to 10% YoY in May from 10.1% YoY in April on slower YoY consumer price inflation. After adjusting for retail price inflation, retail sales volume growth picked up to 9.7% YoY in May from 9.3% YoY in April.

Private sector investment weakened to 0.9% YoY in May, calling for more effective policy support. Private FAI growth slowed further to 0.9% YoY in May from 4.3% YoY in April, and >10% YoY in 2015, and the gap between public and private FAI continued to widen. In our view, the key to a more sustainable investment cycle lies in the private sector investment confidence. A stable, well-coordinated, transparent, and more supportive policy environment is key for boosting private sector investment growth.