Analysts at Standard Chartered says that China’s growth fell short of market expectations in May as industrial production growth decelerated to 5% y/y from 5.4% in April, compared to market forecast of 5.4%.

• “The longer May Day holidays weighed on production activity but boosted retail sales growth to 6.4% y/y in May in real terms from 5.1% previously. Fixed asset investment (FAI) growth moderated to 2.7% y/y in May in real terms, from 4% in April, due to slower growth in infrastructure and land investment. The labour market remains stable, with the surveyed unemployment rate unchanged at 5% in May.
• While growth has underwhelmed in the first two months of Q2, it could pick up strongly in June as China tends to post slow growth at the beginning of a quarter and stronger growth in its final month. In other words, overall GDP growth may not have changed much from 6.4% y/y in Q1.
• Nevertheless, uncertainty is rising due to the renewed trade conflict between the US and China. We estimate that 25% tariffs on all US imports from China could deduct 1.2ppt from China’s annual GDP growth.
• We believe China can still achieve its GDP growth target of 6-6.5% for 2019. The proactive fiscal policy approved for 2019 should offset much of the negative impact of higher US tariffs.
• We forecast additional cuts of 100bps to the reserve requirement ratio (RRR) or an equivalent amount of liquidity injection via targeted RRR cuts, medium-term lending facility (MLF) or targeted MLF in the rest of 2019. The PBoC is also likely to lower the MLF or the open-market-operation (OMO) rates.”