The Chinese economy remains sluggish but prospects may be improving slightly.

Six-month growth in industrial output is estimated* at 3.4% in May (i.e. 6.9% annualised), little changed from April’s 3.3%, which was the lowest since August 2012.

Economic weakness, however, has not been confirmed by monetary trends. Six-month growth in real narrow money M1 was 4.7% in May, in line with the recent average and historically consistent with a faster pace of industrial output expansion – see first chart. The broader real M2 aggregate is giving a more positive message, with a six-month May rise of 6.9%.

Pessimists are focusing on slower growth in bank loans and the broader “total social financing” credit measure. This, however, may be partly a reflection of recent softness in activity rather than a pointer to prospects – credit is usually a coincident or lagging economic indicator, while the money supply leads. Real loan / credit growth, in any case, remains solid – second chart.

The suggestion that economic momentum will revive near term is supported by a notable rise in the “official” manufacturing purchasing managers’ new orders index, adjusted for seasonals**, in May – third chart. This contrasts with a fall in the equivalent Markit measure but the official survey has been more reliable historically (i.e. divergences have usually been resolved by the Markit index moving in the direction of the official series rather than vice versa).

The recent fall in six-month industrial output growth below real M1 as well as M2 expansion suggests an improving liquidity backdrop for Chinese markets, assuming no change in monetary policy.

*All growth rates quoted here are based on monthly break-adjusted levels series estimated from official data and incorporating a seasonal adjustment.
**The official series is labelled as seasonally adjusted but displays a pronounced seasonal pattern.