China May data to show economy steadying but still in need of support

BEIJING

A worker welds at a construction site in Yiliang, Yunnan province, February 28, 2015.

Reuters/Stringer

A deluge of Chinese data due next week may show some signs of steadying in the world's second-largest economy thanks to stimulus measures, but analysts say more support is needed to counter headwinds from a property downturn and patchy exports.Industrial output and retail sales are forecast to have expanded at a slightly faster pace in May, a Reuters poll of 22 economists showed, but factory deflation is seen persisting while uneven global demand probably remained a drag on exports.
"Thanks to escalating policy support, we expect May's economic data to show another marginal improvement in production activity, though demand indicators may have remained lackluster," economists at UBS said in a research note.

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"We believe another 25 basis points (bps) rate cut is necessary to further dampen borrowing costs for the real economy," they said in the note.
China cut interest rates for the third time in
six months in May - on top of two reductions in the amount of money banks must keep in reserve - in a bid to lower companies' borrowing costs and stoke a sputtering economy that is headed for its worst year in a quarter of a century.
Many analysts have already penciled in sub-7 percent growth for the second quarter, raising the risk that the government will not meet its full-year growth target of around 7 percent.
HEADWINDS PERSIST
The Reuters poll showed the May indicators will do little to change the broad picture of an economy struggling under the weight of a property downturn, widespread factory overcapacity and local government debt.
Factory output growth in May is seen picking up a touch to 6.0 percent from April's 5.9 percent, while retail sales growth is forecast to have quickened to 10.1 percent from 10.0 percent in April.
Fixed asset investment is expected to have risen 12.0 percent in the January-May period, the same rate as in the first four months of this year, the poll showed.
Broad M2 money supply is seen up 10.5 percent in May compared to a year ago, accelerating from April's 10.1 percent.
The amount of new loans disbursed by banks was seen rising to 900 billion yuan (94 billion pounds) last month from April's 707.9 billion yuan.
The picture on the external side remained fairly weak, with exports seen down 5.0 percent in May from a surprising 6.4 percent fall in April, while imports were forecast down 10.7 percent, versus a 16.2 percent tumble in April.
The soft imports suggest domestic demand isn't picking up as much as policymakers would like.
This is borne out by sustained pressure on profit margins at Chinese companies, with the poll picking producer deflation to have persisted for more than three years. The producer price index is seen falling 4.5 percent in May versus 4.6 percent drop in April.
The UBS economists said that financing costs were still high in both nominal and real terms, which continued to hurt corporate earnings and balance sheets.
Annual consumer inflation is seen at 1.3 percent in May, down from 1.5 percent in April, and remained well below the annual government target of 3 percent, the poll showed.
(Reporting by Judy Hua and Kevin Yao; Editing by Shri Navaratnam)