Investment in China slows in May, but industrial production beats forecasts

Fresh readings for key Chinese activity indicators appeared to show the country's economy was relatively steady in May, but some economists sounded a somewhat sceptical note on some of the underlying trends, which they believed hinted at a continuing slowdown.

Industrial production in Asia's largest economy expanded at a 6.5% year-on-year clip last month, edging just past economists' forecasts for an advance of 6.4%.

However, Julian Evans-Pritchard and Chang Liu at Capital Economics believed the underlying picture was in fact weaker due to the shortfalls in how those figures were compiled.

Instead, they preferred to look at the output volumes for individual categories, explaining that they had been a more reliable guide to economic trends in the past.

Thus, steel and cement production both slowed, they said, suggesting a moderation in construction activity.

Electricity output - widely regarded a good proxy for industrial output - also edged lower, while production of mobile phones as flat year-on-year - for the first time since 2015.

Year-to-date the official data showed fixed capital investment increased by 8.6% (consensus: 8.8%). That implied growth of 7.9% year-on-year in May, down from 8.3% during the preceding month.

That decline reflected lower prices, not volumes, they said.

"But the bigger picture is that investment growth remains considerably weaker in real terms than a glance at the headline nominal data would suggest," the two economists said.

"The slowdown of fixed-asset investment growth was due primarily to sluggish real estate investment, as manufacturing and infrastructure FAIs both experienced sequential expansion. That said, we do not expect such expansion to sustain as China's overall liquidity tightening may trigger more de-leveraging and de-inventory in the next few months," analysts at Citi chipped in.

Meanwhile, the rate of growth in retail sales was steady at 10.7% year-on-year (consensus: 10.7%).

According to Capital Economics's China Activity Proxy economic growth stabilised at a 6.2% year-on-year pace in April, after slowing from a peak of 6.8% hit in December, and was no stronger in May.

The International Monetary Fund on the other hand on Wednesday revised its forecast for Chinese GDP growth in 2017 from the 6.6% pace it estimated in April to 6.7%.