Chinese recovery remains sluggish – UOB

The moderation in China’s industrial production came within expectation while retail sales and fixed asset investment slowed more than expected in May. New home prices also rose at its slowest pace in four months and the youth unemployment rate hit a fresh record high in May. 

China’s post-Covid recovery is running out of steam with risks that the economy may weaken further without stronger fiscal and monetary policy support. 

As expected, the PBOC cut the benchmark 1Y medium-term lending facility (MLF) rate by 10-bps to 2.65% today following a 10-bps reduction in the key 7-day reverse repo rate to 1.9% on Tue. The PBOC net increased liquidity as it conducted CNY237 bn of 1Y MLF to replace CNY200 bn that matured this month.  

We expect another 25-bps reduction in banks’ reserve requirement ratio (RRR) in 2H23 as well as more measures to boost the property market recovery. 

We maintain our 2Q23 GDP growth forecast for China at 7.8% y/y which is measured against the low base during Shanghai’s two-month Covid-19 lockdown in 2Q22. With stronger monetary and fiscal support, we think China’s full-year GDP growth is still on track to reach our forecast of 5.6% in 2023. Having said that, the downside risks have certainly increased.