China's Growth likely to decelerate in Q2

China's total investment growth is likely to have decelerated further in the January-May period. Prices of steel products and cement have not rebounded YTD, despite accelerated approvals of new infrastructure projects. This implies that demand for key inputs remains sluggish due to weak infrastructure investment.

Funding constraints remain the most important factor curtailing local governments' infrastructure investment. While local government bond issuance (to replacematuring debt) has just kicked off, this is not expected to bring new cash inflows to finance investment projects. 
Manufacturing investment likely stayed soft on weak demand, overcapacity and low return on physical investment. New land purchases and new housing starts both point to a continued property-market correction, which is likely to dampen developers' investment appetite.

"YTD FAI growth slowed further to 11.6% y/y in May from 12.0% in April. This implies investment growth of 10.7% y/y in May alone, following a historical low of 9.4% in April", estimates Standard Chartered.

Production likely expanded at a faster m/m pace in May - the official manufacturing PMI production index rose 0.3ppt to 52.9, and coal consumption at six key power plants has increased slightly for the past few weeks.

Standard Chartered forecasts IP growth at 6.1% y/y in May, up from 5.9% in April. IP growth in Q2 may be lower than in Q1, however, suggesting a further slowdown in GDP growth in Q2. 

Retail sales growth likely edged lower in May, partly due to the moderation in inflation. Analysts expect nominal retail sales growth to have moderated to 9.8% y/y from 10.0% in April, and real retail sales growth to have remained stable.