Behind the central bank's decision not to cut interest rates is the lowest monthly real estate construction area since the 21st century, which indicates a very important issue. The logic of current policies has changed: In the past, we were used to seeking the necessity of policies from the fundamentals. However, facing a complex internal and external situation, we may need to consider more from the perspective of the policy's own bottlenecks and constraints.
Fundamentally, there is no doubt that policies need to be strengthened. Economic data may not continue the resilience of the first quarter. Looking at the situation in April and May, with the support of a relatively low base, the economic growth rate in the second quarter is expected to be around 5%, lower than the 5.3% in the first quarter. From a structural perspective, manufacturing investment in May stands out, while other sub-items have cooled to varying degrees (especially in real estate, where both investment and housing prices have fallen).
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Macro policies &#34;should be implemented&#34; but are not, and the bottlenecks may be more important. For example, in terms of fiscal policy, we believe that there are two major constraints worth noting: The first and foremost is the possible lack of projects, which may lead to a longer time from financing to physical work; secondly, the long-standing issue of local government debt that we have been talking about. Local complementary financing is an important part of infrastructure construction, and it may be necessary to adjust the strict regulatory approach in this area.
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As for monetary policy, the stability of exchange rates, interest rate differentials, and the fight against idle capital, have made the central bank always cautious about cutting reserve requirements and interest rates. In addition, coordination between policy departments may still need to be strengthened, especially the convergence of fiscal and monetary forces, which may be an essential condition for us to resolve the current complex situation.
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In its statement, the central bank mentioned that &#34;the continued narrowing of net interest margins will affect the ability of banks to sustainably serve the real economy,&#34; and emphasized that &#34;it is not easy for the RMB to continue to maintain a rate around 7.2 against the US dollar.&#34; We believe that the central bank will remain cautious about cutting interest rates until there is a clear easing of bank costs and external exchange rate pressures. Specifically looking at the economic data for May:
Industrial sector: Cooling off due to holiday misalignment. In May 2024, the year-on-year growth rate of industrial value added was 5.6% (compared to 6.7% in April), seemingly signaling a slowdown in production once again. However, considering the number of working days, the slight cooling of production-related indicators in May is reasonable—in April, there were two more working days compared to 2023, while the number of working days in May was the same as in 2023, which explains why industrial production in April was more likely to &#34;overtake on the curve&#34; than in May, and also explains the slowdown in industrial production in May.
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Looking ahead, the challenge of overcapacity is still worth vigilance. Based on the performance of industrial sub-sectors, most industries are still in a situation of &#34;rising quantity and falling prices&#34; (corresponding to the fourth quadrant in the scatter plot), and the problem of overcapacity is still spreading. Considering that the decline in the May PMI production index is the largest in nearly a decade, it is very important to accelerate the clearance of overcapacity and change the situation where &#34;production continues to outpace demand.&#34;
Manufacturing: Moving forward against the trend under the new quality productivity policy. In a previous report, I pointed out the emergence of a situation where &#34;manufacturing is strong and infrastructure is weak&#34; by 2024, which became more evident in May. In May, the year-on-year growth rate of manufacturing investment reached 9.4% (compared to 9.3% in April), showing a slight acceleration once again. Manufacturing investment has once again become a key driver of economic growth, and unlocking the &#34;golden key&#34; to manufacturing investment is no different from the development of new quality productivity—industries with higher relevance to technology have mostly become the main drivers of manufacturing investment, including but not limited to industries such as electronic equipment, general equipment, special equipment, automobile manufacturing, and electrical machinery. I believe that under the continued stimulus of technology innovation policies, the prosperity of these industries will continue to maintain at a good level.
Infrastructure: From January to May, the investment growth rate has also seen a &#34;five consecutive decline.&#34; In May, the year-on-year growth rate of infrastructure investment was 3.8% (compared to 5.9% in April), and the growth rate of infrastructure investment has continued to decline this year, with May's infrastructure investment being the slowest growth rate in nearly two and a half years. Looking at the detailed data of infrastructure investment, the adjustments in public utilities and transportation warehousing sectors in May are quite significant.
Infrastructure still faces quite a few headwinds, with the &#34;hands-off&#34; approach of the fiscal sector being a bottleneck. Looking at the recent trends in high-frequency data related to infrastructure, the asphalt starting rate is still at historically low levels, and the road to reducing asphalt inventories is still a long way off, indicating that the efforts to stabilize infrastructure are indeed far less than in 2023. The main indicator of the efforts to stabilize infrastructure is the extent to which the fiscal sector intervenes: although the slope of the progress of new special bond issuances has steepened, it has not changed the overall slow progress; in addition, under the context of debt reduction, the net financing situation of local government bonds in 12 heavily indebted provinces and cities is poor, which is also a major headwind for infrastructure. The boosting effect of subsequent accelerated issuances of special bonds and the newly issued ultra-long-term special national bonds on infrastructure is worth looking forward to
The housing market has not stabilized, and real estate needs to be repaired. In May, real estate investment (down 11.0% year-on-year) and housing prices both weakened. On the one hand, the &#34;517 New Policy&#34; was implemented in the latter half of the month, but its effectiveness in stabilizing the real estate market still needs time to show. On the other hand, against the backdrop of insufficient willingness of residents to expand their balance sheets, the stimulative effect of the relaxed housing credit policy in the new policy is not as strong as before. More importantly, the stabilization of housing prices requires waiting for the accelerated progress of real estate acquisition and storage in the new policy.
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At least in terms of construction and sales area, there is no significant reversal signal yet: In May, the year-on-year decline in new construction, construction, and completion areas all widened further, while the year-on-year decline in sales area slightly narrowed. The loosening of housing finance by the central bank in May and the policy relaxation of home purchase restrictions in top-tier cities were first reflected in the second-hand housing transaction level, while the recovery of new home sales is still in its early stages.
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Two favorable factors helped the year-on-year growth rate of social retail sales rise to 3.7% in May. First, the staggered May Day holiday this year resulted in more holidays in May compared to the same period last year, which may have dragged down April and supported the year-on-year growth in May. Second, this year's 618 e-commerce promotion activities started 4-7 days earlier than last year, leading to a year-on-year positive growth in physical goods online retail sales in May, providing some support to social retail sales.
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The recovery of optional consumer goods was a highlight in the structure of social retail sales in May. Communication equipment, home appliances, and cosmetics were the top drivers in May, but considering the year-on-year negative trends in communication tools and household appliances in the May CPI, the significant increase in physical goods during the e-commerce promotion period is still evident.
(Personal opinion, for reference only, not as investment advice)

The soft economic growth in May, changes in policy logic, and the need to focus on policy bottlenecks and constraints. Data shows that the economic growth rate in the second quarter is expected to be around 5%, lower than the 5.3% in the first quarter. Manufacturing investment has performed well, but real estate investment and housing prices have fallen. Fiscal policy is constrained by the lack of projects and local debt issues, while monetary policy is influenced by factors such as exchange rate stability and interest rate differentials. The central bank is cautious about interest rate cuts and needs to strengthen the coordination of fiscal and monetary policies. The year-on-year growth rate of industrial value added is 5.6%, signaling a slowdown in production

1. Core descriptive facts: The central bank's decision not to cut interest rates is influenced by the lowest monthly real estate construction area since the 21st century began. Economic growth in the second quarter is expected to be around 5%, lower than the first quarter's 5.3%. Manufacturing investment in May stood out, while other sectors experienced cooling, especially in real estate.
2. Viewpoints and supporting logic: 
   a. The policy logic has shifted from focusing solely on fundamentals to considering policy constraints and bottlenecks in the current complex internal and external environment.
   b. Despite the need for policy reinforcement, constraints in fiscal policy, such as project shortages and strict local debt regulations, may hinder effective implementation.
   c. Monetary policy faces challenges due to stable exchange rates, interest rate differentials, and the need to combat capital flight, making the central bank cautious about rate cuts.
   d. Enhanced coordination between fiscal and monetary authorities is essential to navigate the current complex economic situation effectively.
   e. The central bank's cautious stance on rate cuts is supported by concerns about narrowing net interest margins affecting banks' ability to serve the real economy and the difficulty of maintaining the RMB exchange rate around 7.2 against the USD.
   f. May economic data indicates a cooling in industrial production due to the timing of holidays, with industrial value-added growth at 5.6%, signaling a slowdown. Overcapacity remains a concern, with most industries facing the challenge of "quantity rising, price falling."
   g. The manufacturing sector is moving forward against the odds under new quality productivity policies, emphasizing the importance of clearing excess capacity and balancing production with demand.

May Economy: Growth Drivers and Policy Bottlenecks