The Chinese economy only expanded by 5.5% y/y in 1H23 despite the low comparison base. Taking into consideration of the growth headwinds and potential for policy support to underwhelm, we downgrade our forecast for China’s GDP growth to 5.0% (from 5.6%) for 2023 and 4.5% (from 4.8%) for 2024. Our forecast for 2H23 GDP is now at 4.5%. 

The key macroeconomic data for Jun that were released alongside the GDP were mixed as industrial production rebounded while weaker domestic indicators including retail sales and property investment as well as further surge in the youth unemployment rate were concerning.

As expected, the People’s Bank of China (PBOC) kept the benchmark 1Y mediumterm lending facility (MLF) rate unchanged at 2.65% today following a 10-bps cut in Jun. The central bank net increased liquidity by CNY3 bn as it conducted CNY103 bn of 1Y MLF but this was less than consensus expectation of CNY125 bn. 

We maintain our expectation of stronger property support measures (in addition to recently announced measure to ensure developers’ access to financing) and our call for another cut to banks’ reserve requirement ratio (RRR) in 2H23. Given the weaker than expected growth and muted price pressure in China, we think the likelihood for a further interest rate cut has also increased. Thus, we now factor in another 10-bps reduction in the 1Y MLF rate in 3Q23. As such, we see the 1Y and 5Y loan prime rates falling to 3.45% and 4.10% (from current 3.55% and 4.20%) respectively.