May data calls for more easing

Key Points

• The month-over-month growths of major economic indicators improved this May compared with April, but, the broad-based year-over-year growth deceleration of these indicators and the 20.8% youth jobless rate reflect the persisting challenge of insufficient domestic demand.
• Both property sector and infrastructure FAIs dragged on overall FAI investment in May. Although weaker fiscal support could be the reason for recent deceleration in infrastructure FAI growth, we expect government to vamp up the infrastructure spending in the remaining part of this year to help stabilize the economy.
• Manufacturing FAI remained resilient, e.g. automobile manufacturing FAI (17.9%yoy YTD), electrical machinery & equipment FAI (38.9%yoy YTD); the strength of IP production was in electric machinery equipment and automobile as well in May, with them delivering a strong growth of 15.4%yoy and 23.8%yoy respectively.
• Recent policy rate cuts signalled the beginning of another around policy stimulus, to stabilize growth, with such, we maintain our expectation of 5.5% GDP growth forecast for 2023.
• Large (possible larger) negative yield spread may weight on CNY in the near term, however, with the expectation of Chinese economy to improve gradually on policy support and improving sentiment, we see yuan to strengthen in medium term against the dollar. We expect USD/CNY to reach 6.9 by the end of Q2, 2023, 6.8 by the end of Q3 2023, and 6.7 by the end of Q4 2023.

---

GROWTH MOMENTUMS OF KEY INDICATORS IMPROVED IN MAY

Source: CEIC, MUFG GMR

---

PBOC CUT KEY POLICY RATES THIS WEEK TO BOOST THE ECONOMY

Source: Bloomberg, MUFG GMR

---

MUFG PERIOD-END FORECASTS

Source: Bloomberg, MUFG GMR