Economic activity in China appears to have slowed further during the month of May, although the moderation in growth continues to occur at a gradual pace – keeping concerns of a hard-landing at bay. Nevertheless, hopes of a meaningful acceleration in growth this year have faded, and expectations are now for growth to stabilise at sub-8% levels. As a result of the slower than expected growth, we reduced our growth forecast for 2013 last month to 7¾% (from 8% previously) – although even softer growth remains a possibility. Authorities appear content with slower rates of growth suggesting that monetary policy will remain unchanged until at least next year. However, there has been a noticeable tightening of liquidity conditions leading up to the national holiday, and following a clamp down on capital inflows.

Indicators of real economic activity show that growth in China has stagnated, but has maintained a reasonably rapid pace. Outcomes for May came in close to market expectations, which have become far less optimistic then they were at the start of the year. Industrial production growth ebbed slightly lower in May to 9.2%, which is well below the long run average. Taken together with softer growth in the services sector – as indicated by the non-manufacturing PMI index – that implies that GDP growth for the June quarter may not improve from the disappointing rate (7.7%) recorded in the March quarter. Manufacturing PMI’s show that small and medium sized manufacturers came under renewed pressures with the HSBC PMI – which is more representative of these firms – dipping below 50 to 49.2 (from 50.4). In contrast, the official PMI index – which is more representative of larger and state owned firms – improved marginally to 50.8 (from 50.6).

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• Brief China Economic Update – 11 June 2013 (PDF 201 KB)