- M1-M2 gap signals weak credit appetite and low business and consumer confidence.
- Fixed asset investment slowed, dragged by real estate investment and private sectors.
- Retail sales rise, but job concerns and falling housing wealth limit household spending recovery.
- Implication to forecast: We expect additional 20bps LPR and 50bps RRR cuts to support growth in 2H.
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Ahead of the release of major May’s data, the PBOC injected RMB 400 billion into the financial system via Outright Reverse Repo last Friday. This is a new policy tool introduced in October 2024. The external uncertainty, renewed property market routs, and extending disinflation call for further easing. Following rate cuts in May, the PBOC is expected to rely more on liquidity injections in the near term.
Money supply
Latest monetary data points to weak money demand despite ample liquidity. M2 growth eased to 7.9% YoY in May from 8.0% in April, following the state-owned banks’ fixed deposit rate cut by 15bps during the month. Households showed increasing preference for cash over time deposits, leading M1 growth to rise from 1.5% to 2.3%. The ongoing divergence between M1 and M2 reflects continued weakness in both corporate confidence and consumer sentiment.
Investment and property
The outlook for investment and consumption remains uncertain. Overall fixed asset investment (FAI) growth slow from 4.0% to 3.7% YoY, with private sector FAI dropped to 0% growth in the first five months. State-sector investment grew 5.9% YoY, suggesting that policy-driven infrastructure spending is doing the heavy lifting.
Real estate investment remained as the key drag, with contraction widened from -10.3% YoY YTD in April to -10.7% in May. Developers continued focusing on completing unfinished projects, as new residential starts remained at double-digit decline. Inventories were the paramount concern. Primary market home sales also plunged by 26% YoY in May.
Consumption
Retail sales grew 5.0% YoY YTD, further pickup from April, supported by subsidies for durables like home appliances and electronics. Still, household sentiment is under pressure from weak job prospects and declining income growth. High youth unemployment and ongoing property market stress are likely to weigh on spending. Our estimates suggest that a 10% fall in home prices could shave 1.5ppts off retail sales growth.
Credit growth
Private sector credit demand remains weak, highlighted by the contrast between strong government bond issuance and muted private lending. New loans dropped significantly to RMB 620 billion in May— 35% lower YoY. The continued decline in medium- to long-term corporate loans reflects cautious business sentiment, while a fall in household lending, often tied to mortgages, underscores soft consumer borrowing. Short-term household loans also plummeted, indicating weak consumption sentiment.
External trade and tariffs
Export growth slowed to 6.0% YoY YTD in May, down from 6.4% in April, mainly due to weaker shipments to the US. Similarly, imports contracted by 4.9% YoY YTD, reflecting softer demand for intermediate goods as manufacturers prepare for weaker orders. While recent trade talks have sent positive signals, the broader trade outlook remains uncertain.
Inflation and real rates
Tariff driven overcapacity and front-loading, as well as intense price competition between internet companies are weighing on domestic prices. Headline CPI registered -0.1% YoY in May, while core CPI grew at 0.6% YoY. Producer prices extended their deflationary streak for the 32nd consecutive month, with PPI falling -3.3% YoY. Contracting prices are perking up real interest rates and hence restraining credit demand.
Policy and rates implication
Against this backdrop, further monetary easing is anticipated. Policy is expected to lean toward liquidity injections rather than additional rate cuts to protect banks’ net interest margins. Even another moderate 20bps of 1Y LPR cut this year, the net interest margin of Chinese banks will fall further to 1.45% by end of this year. As such, another 50bps of Reserve Required Ratio (RRR) cut this year is likely, which will in turn inject RMB1trn of liquidity into the system. The upshot is that front-end rates such as R007 and DR007 will remain anchored. On fiscal front, Beijing will accelerate bond issuance to finance infrastructure and unsold home absorption. Long-end yield will remain steady and hence maintain a steepening CGB curve.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
[email protected]
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Related Insights
- Research Library16 Apr 2026
- Macro Insights Livestream, April 202615 Apr 2026
- Singapore: Steeper SGD policy band slope for inflation defence14 Apr 2026
Related Insights
- Research Library16 Apr 2026
- Macro Insights Livestream, April 202615 Apr 2026
- Singapore: Steeper SGD policy band slope for inflation defence14 Apr 2026