Morgan Stanley adjusted down its full-year growth projection for China by 20 basis points to 4.6% following official data showing activity growth of 4.3% in June, a pace that missed both consensus expectations and Beijing's stated target.
The bank's economics team identified several proximate causes for the shortfall. Infrastructure investment weakened after a first-quarter surge that effectively pulled forward some projects. Refining and petrochemical production was curtailed in part by movements in oil prices. Consumption also weakened, with Morgan Stanley noting the waning impact of trade-in incentive programs, a soft job market and continued strains in the property sector as contributing factors.
On fiscal and policy orientation, Morgan Stanley's China economics group said authorities are likely to concentrate policy efforts on artificial intelligence and energy infrastructure instead of prioritizing consumption-led measures. The team linked this emphasis to intensifying US-China competition in technology sectors. They also said they do not expect a supplementary budget, pointing out that roughly 2 trillion yuan of in-budget fiscal resources remain available for deployment in the second half of the year.
Looking ahead, Morgan Stanley expects moderately stronger sequential growth in the latter half of the year. The bank cites quicker deployment of budgets and the prospect of normalizing oil prices as supporting factors for that improvement.
The report’s sector and activity details for June showed continued weakness in property markets and mixed signals elsewhere in the economy.
- Property: New property starts fell 26.0% year-over-year in June, while gross floor area sold dropped 16.3% year-over-year. Morgan Stanley's property team noted that home sales declined further in June after an uptrend that had started in May reversed.
- Investment and industry: Fixed-asset investment was down 11.2% year-over-year for June. Industrial production rose 5.3% year-over-year in June, improving from 4.5% in May. The purchasing managers index edged up to 50.3 in June from 50.0 in May.
- Commodities and metals: Steel exports increased 7% year-over-year to 10.3 million tons in June, and crude steel output edged up 0.4% year-over-year. Iron ore imports climbed 6% year-over-year to 113 million tons in June, and aluminum production rose 4.7% year-over-year to 4.0 million tons.
The note also referenced the iShares MSCI China ETF (MCHI) in the market context surrounding these developments.
Overall, Morgan Stanley’s revision and the underlying data underscore a mix of cyclical and sector-specific headwinds affecting growth, with authorities appearing to favor targeted supply-side and infrastructure-related policy tools over broad consumption stimulus for the near term.