• The PBoC cut benchmark lending and deposit rates by 25bp this month in response to a clear moderation in inflation and soft demand conditions. Domestic demand may receive support from recent stimulus measures, but global uncertainty (particularly in Europe) will continue to pose headwinds.
• The partial economic indicators for May continued to be relatively soft, but were generally better than first feared following the central banks interest rate cut. There were also some tentative signs that recent stimulus measures are having an effect. Nevertheless, annual growth in manufacturing production has remained around their lowest levels since the global financial crisis and suggests that GDP growth probably slowed noticeably in the June quarter
• In response to the softer partials, we have revised our forecast for China’s GDP growth in 2012 slightly lower to 7¾ per cent (down from a forecast of 8 per cent previously). GDP growth is expected to hit its slowest pace this current quarter before stimulus measures bear fruit in the second half of the year.
• Our expectations for policy loosening include two to three cuts in the RRR in 2012, and a second cut to the lending rate later in the year (contingent on further moderation in CPI inflation).

For further analysis download the full report.

• China Update – June 2012 (PDF, 308kb)