Industrial output rose 4.4% y/y in May, up 0.5 pps from April, comparable to its pre-pandemic level, and was down just 1.5 pps from Q4 2019. Investment was up 3.9% y/y, and up 3.1 pps from April, down 1.5 pps from Q4. Government investment is the main force lifting overall investment growth.

Consumption demand continued to recover in May. Retail sales of social consumption goods fell 2.8% y/y, up 4.7 pps from April. The global pandemic is not showing any sign of abating, and is heavily impacting trade. In May, exports were up 1.4% y/y, down 6.8 pps from April, while imports plunged 12.7% y/y.

Prices are all falling, creating conditions for future money expansion. The CPI rose 2.4% y/y, down 3 pps from January, mainly driven by food prices. Producer prices fell further. The ex-factory price index of industrial goods decreased 3.7% y/y, and the PPI fell 5% y/y, down 0.6 and 12 pps respectively from April.

Monetary policy is expanding. Major financial indicators all show upward trends. At the end of May, M2 was up 11.1% y/y, and M1 up 6.8% y/y, up 2.3 and 2 pps from the end of February.

On June 12th, Beijing reported its first local coronavirus case, after more than 50 days with zero new locally-transmitted cases. A total of 236 new confirmed cases had been recorded by the writing of this report. Even though such numbers seem insignificant, much evidence shows that COVID-19 might be entering a second phase. This has significantly increased public, and investor, sentiments of uncertainty. Our own survey data shows that 30% of Chinese people believe this virus will persist for a long time. Factoring in the worsening global situation, we are revising downward our GDP growth forecast to 1.4%, which is below other major forecasts, such as that of the IMF.

The National Committee of the Chinese People's Political Consultative Conference (CPPCC) convened the annual two sessions on May 21st. Although for the first time the government did not set an annual growth target - possibly due to so many COVID-19 uncertainties ahead - we expect the implicit growth target is 1.8% for now, given the projected deficit and inflation numbers.

The economy is quickly recovering, as the pandemic has come under control. In April, industrial output growth turned positive, and was up 3.9% y/y, and up 5 pps from March, down only 2 pps from the pre-pandemic level, in Q4 2019. Investment was up 0.8% y/y, and up 10.3 pps from March, mostly driven by expansionary state investment.

Consumption decreased less. Retail sales of consumption goods fell 7.5% y/y, up 8.3 pps from March. Exports were 4% y/y, comparable to the pre-pandemic level. Imports fell 6.1% y/y after seasonal adjustment, down 5.4 pps from Q1. Decreased imports are in line with overall weak domestic demand.

CPI was up 3.3% y/y after seasonal adjustment, down 1 pps from March. We expect CPI to fall further this year, led by large declines in food-related categories.

Monetary policy shows strong support for the economy. M2 was up 11.1% y/y, and M1 increased 5.5% y/y, up 1 and 0.5 pps from March. RMB loans from financial institutions were up 13.1% y/y, up 0.4 pps from the end of March.

China’s housing prices rose at a slightly faster pace in April. According to the National Bureau of Statistics (NBS), average new home prices in 70 major cities rose 0.5% in April from March, a pace not seen since October 2019, and following a 0.1% increase in March. The strong housing market lends support to macroeconomic and financial stability; for example, around 50% of loans in China are directly or indirectly linked to the real estate market. Strong housing investment also shows investor confidence amid domestic pandemic and global economic uncertainties, a key factor furthering the overall recovery.

The Chinese economy was hit hard by the coronavirus in Q1, and GDP fell -6.8% y/y. Because the virus is almost contained in China, economic activities have since March been gradually picking up, and there were clear signs of recovery. Industrial output was down -1.1% y/y, up 12.4 pps from January-February.

Consumption has been hardest hit, largely due to quarantining. Retail sales of social consumption goods fell -19% y/y in Q1, and -15.8% y/y in March, up 4.7 pps from January-February. Trade has so far been largely unaffected. Exports in March were up 2.8% y/y after adjustment, down only 1.4 pps from Q4 2019. Imports were up 2.4% y/y, down 2.8 pps.

Fixed asset investment has been left as the only major factor to keep the economy afloat, because of future weakening overseas demand, and of domestic consumption demand. By March, investment had not recovered to normal levels, falling -9.5% y/y, up 15 pps from January-February.

CPI eventually fell, and was down -0.6% m/m after adjustment, and up 4.3% y/y in March, down 1 pps from January-February. The ex-factory price index of industrial goods fell -1% m/m, and was down -1.5% y/y. PPI fell -1.1% m/m, and was down -1.6% y/y. Major financial indicators are the only ones not negatively impacted. M2 rose 10.1% y/y, and M1 rose 5% y/y, up 1.4 and 0.2 pps respectively from the previous month.

On April 17th, President Xi Jinping chaired a major meeting of the Politburo, China’s highest policy decisionmaking body,  which promised to step up the magnitude of policies to achieve the country’s goal of “six stabilities:” stable employment, trade, financial markets, investment, foreign capital and expectations, on the condition that the virus has been effectively controlled. We believe there will be expansionary monetary and fiscal policies, such as interest rate cuts and accelerated infrastructure construction, but not a mass flooding to the market, per the approach of the Fed. Unlike in other major economies, China has been saving for rainy days to make these policies feasible, with its still-sizable gap with a zero interest rate, low central government debt, sizable state-controlled economy meaning non-cyclical unemployment, implicit social security system meaning unemployed migrant workers still possessing agricultural lands, and a high household saving rate.

The coronavirus outbreak in China has had major short-term negative effects on production activities. However, as of March 18th, within China it is largely contained, with zero new cases. The total number of global infection cases outside China has now surpassed the total number of cases in China, and the number is expanding rapidly. Industrial output in China fell -13.5% y/y in January-February, and investment fell -24.5% y/y. But we believe these two major indicators -- especially investment -- will recover soon.

We believe the Chinese economy and finance may be relatively stable, and recover quickly, amid global turmoil. Many economic activities have already recovered to a large extent, thanks to the “Internet plus” program initiated by the state council two years ago, which allows employees to work at home. The Chinese Central Bank has a long way to cut before reaching a zero interest rate, leaving room for further monetary easing, while other major economies’ central banks, including the Fed, now have interest rates near or at zero. The partially state-owned feature of the Chinese economy enables the government to effectively adopt targeted economic policies, such as extending financial favoritism to SMEs.

Negatively impacted by the curfew, with malls and restaurants closed, retail sales of social consumption goods fell -20.5% y/y. In January-February, exports fell -15.9% y/y, down 20 pps from Q4 2019. Imports fell -2.4% y/y, down 7.6 pps from Q4. Even though we believe these major indicators will recover quickly, the worsening coronavirus situation in other countries will hurt trade. We don’t expect recovery to rebound to its pre-coronavirus level soon.

CPI rose significantly in January-February, by 5.3% y/y, and up 0.8 pps from December, due to transportation segmentation organized for the virus curfew. The collapse of major world commodities such as oil also negatively impacted Chinese producer prices. In February, the ex-factory price index of industrial goods fell -0.4% y/y, and PPI fell -0.5% y/y. Both indicators are continuing their declining trends.

The coronavirus, however, has not had the major impact on Chinese financial markets as it has on other production factors. Major financial indicators are mostly stable. At the end of February, M2 was up 8.8% y/y, the same as at the end of 2019, and M1 was up 4.8% y/y, or 0.4 pps.