China's early recovery with funding still the bottleneck: analysis

Further easing also seen for now.

For the batch of Chinese Macro data released on 11 June, mild improvement was seen in both industrial production and real retail sales, confirming judgment that the economy has entered an early stage of recovery.

According to a research note from CCB International, in addition, the report has seen further signs that the property sector is coming out of the trough amid accelerating investment and continued destocking.

In particular, floor space sold rose at its fastest pace in nearly two years.

Here's more from CCB International:

However, fixed asset investments came in disappointed, rising 11.4% YoY YTD in May (Apr: 12.0%), versus Bloomberg consensus of an 11.9% increase.

In May alone, the headline growth ticked up to 10.0%, versus a 9.4% in April. However, in our view the pickup will not last given continued softness in FAI funding, which rose at a slower pace of 4.2% YoY in May, marking its six-month low.

Unless a broad-based and resilient pickup is seen, we continue to look for further easing, especially in the form of lower rates at the long-end, to foster a sustainable recovery. In PBoC’s current tool kit, pledged supplementary lending (PSL) is probably the most effective tool for bringing down long-term rates.

The current financing rate through PSL is at 3.1%, well below the 1-year lending rate of 5.1% at commercial banks. In addition, we continue to expect another 25bp interest rate cut by the end of June, along with more targeted liquidity injection towards the public sector, to boost investments.

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