Morgan Stanley: Beijing Will Fine-Tune, Not Pivot
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Morgan Stanley observes that April and May data confirm a deepening dual-speed economy in China: exports and industrial production remain resilient, while domestic demand has weakened more visibly. Retail sales softened due to high bases and a cooling labor market, and consumer confidence faltered again after a brief improvement, leaving the household sector the weakest link.
The firm does not view this as an imminent collapse warranting a comprehensive policy pivot. Instead, the urgency for fine-tuning has risen. The most probable near-term response is accelerating fiscal disbursements and supporting strategic infrastructure, rather than launching massive broad-based stimulus for real estate or consumption. Special refinancing bond issuance has accelerated after a slow start, but policy bank bond net financing continues to contract, indicating uneven policy support.
Energy data reveals households cutting non-essential fuel consumption, with weak vehicle usage and domestic flights, while power generation remains steady, supported by commercial inventory, coal, and electricity demand. Morgan Stanley tracks Q2 GDP at approximately 4.4%; without timely fine-tuning, full-year growth could approach or fall below the lower bound of the 4.5%-5.0% target.
Externally, the combination of robust manufacturing and weak domestic absorption risks widening K-shaped divergence and invites targeted trade protection measures from trading partners concerned about Chinese export and capacity spillovers.
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