two steps forward and one step back

Sub Levels

Deflationary pressure intensifies. The input and output price sub-indices suggest that prices continue to fall in both the construction and services sectors, albeit at a slower pace than in May. In the manufacturing sector, deflationary pressure intensified amid easing delivery constraints and declining demand, which is reflected in the softening of the input price sub-index. PPI prices fell nearly -4.6% y/y in May, and inflation should fall to less than 1% by the end of 2023. That would require at least one more rate cut (-10bps) by the fall of this year (1-year loan prime rate to 3.45%, reserve ratio to 7%). This should encourage traditional funding and curb the rise of shadow banking. .

The labor market is under pressure, which does not bode well for consumer confidence. In the manufacturing sector, the employment sub-index remained well below the 50 mark. But the situation is mixed in the service industry. Caixin’s equivalence sub-index rose slightly to 51.9 in June from 51.5 in May, with an NBS survey suggesting the labor market is improving while the service sector labor market is deteriorating. ing. In the construction sector, an NBS survey showed job prospects are deteriorating. This does not bode well for consumer confidence. Youth unemployment is above 20% on the back of a skills mismatch, and some migrant workers are looking for low-paid services this year instead of working in export factories, especially given weak external demand in developed economies. I’m in business.

Further policy support is needed in this context. In response to the economic slowdown, policymakers are seeking to implement further countercyclical measures, such as the recently approved support for home-related spending. A recent State Council meeting also discussed further measures to boost consumption and increase spending on urban renovation projects. Policy makers are likely to avoid implementing broad-based stimulus measures (such as large cash transfers to households) and focus on more targeted fiscal measures, such as increasing special bond lines for local governments. The annual quota share remained at 61.7%, well below the 2022 level.

China’s economic reopening has not revitalized its capital markets. nevertheless Given the size of the Chinese economy and its still strong growth prospects, the opportunities remain attractive, yet valuations are much lower than other major markets in the developed world. Equity risk premiums are about four times higher than in the US (Figure 5). Low correlation with major markets is attractive during times of limited diversification potential, but capital account restrictions make offshore investments less efficient.

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