China's growth performance in May was a mixed bag. Official industrial production (IP) and nominal retail sales growth were a bit better than in April. Growth in fixed asset investment (FAI) and real retail sales slowed further. We see no concrete evidence that the economy has bottomed out.
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The worst is not yet over, we believe
Official IP growth seems to have stabilized for now, at 8.8 percent year-on-year in May. Electricity production growth, which may be a more reliable indicator of production, also picked up, to 5.9 percent year-on-year from 4.4 percent. Our gauges of the manufacturing inventory cycle (the ratio of new and backlogged orders to inventories of raw and finished goods) and producer confidence (the ratio of raw-material purchases to the average of production and backlogged orders) both suggest that manufacturing momentum improved a little.
However, it is still tough out there. FAI growth continued to slow, in real terms, to 16.4 percent year-on-year in May from an average of 17.4 percent in February-April. Manufacturing and real estate are the biggest drags, offsetting the acceleration in infrastructure investment. There is evidence that central government investment using official budget funds is accelerating, but local government investment remains sluggish, partly due to limited financing.