China's early recovery outlook dampened by slowdown

This involves investment and monetary growth.

On the heels of disappointing trade and inflation data, China’s April activity and monetary data came in uniformly below market consensus.

According to a research note from CCB International, in its view, the sharp slowdown in investment and monetary growth is dampening the outlook of an early recovery in 2Q15F.

It is also putting the government’s 7% GDP growth target for 2015 at risk. CCB International anticipates another interest rate cut of 25bp before the end of June, in addition to the one on 11 May.

Here's more from CCB International:

We believe the rate cut announced earlier is insufficient to remedy the current economic slowdown, given the disappointing April data. For more details, please see China Economics Update: Half-way into the easing cycle, 13 May.

The biggest downside surprise was in fixed asset investment (FAI), which posted slowing growth in all its sectors, including infrastructure.

In April alone, headline FAI registered single-digit growth of 9.4% YoY, down from an increase of 13.2% in March. Investments in infrastructure (excluding electricity), which are usually resilient and led by the government, also rose at a much slower pace of 16.0% YoY in April, versus an 25.2% increase in March. The slowdown in FAI growth was accompanied by moderated funding in the same period.

Amid efforts to boost government-led investments, on 12 May the MOF, PBoC and CBRC together issued Document 102, which qualifies local government bonds as collateral for direct lending from the PBoC through Standing Lending Facility (SLF), Medium-term Lending Facility (MLF) and Pledged Supplementary Lending (PSL), with maturities varying from 1-3 months to 3-5 years.

The administrative measure is designed to facilitate the issuance of local government bonds and lower financing costs for local governments. If implemented in a timely and effectively way, this will help to unleash fiscal spending and mitigate some of the sluggishness in FAI growth.

The Shanghai Composite Index closed 2.4% higher on 15 May, compared to a week ago. Looking ahead, another wave of IPOs will board on 19 – 20 May. The sum of funds that will be locked up in A-share IPOs is estimated to be around RMB5t.

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