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Analysts see hope in May financials

KEY economic data for May, set to be released next week, are expected to provide more evidence that China may be on the road to recovery, analysts said yesterday.

"We maintain our view that the Chinese economy has reached its cyclical bottom and should stage a gradual and steady recovery over the remainder of the year," said Wang Qing, a Morgan Stanley economist.

"Investors seem anxious for more good news in the macro data to justify the recent rally in the equity market."

The Shanghai Stock Exchange has performed well so far this year. The benchmark Shanghai Composite Index rose above 2,700 points this month, up more than 50 percent from the end of last year.

Li Maoyu, an analyst at Changjiang Securities Co, said trade - the sector hardest hit by the global financial crisis - may have reached bottom in April and probably staged a narrower reduction in May. He estimated that exports dropped between 18 percent and 20 percent last month.

China's exports contracted 22.6 percent from a year earlier in April, widening from a fall of 17.1 percent in March.

"There are early signs of a recovery in external demand shown by the just-released China Purchasing Managers Index," Li said.

The PMI, which measures manufacturing activities in the country, registered 53.1 points in May, the third straight month that the gauge has been in plus-50 expansionary territory. Of key importance, new export orders posted a 50.1 reading, the first time above 50 since June last year.

China's domestic spending and investment may have continued their rapid expansion in May, given the effects of China's 4 trillion yuan (US$585 billion) economic stimulus package and other measures targeted at boosting demand such as tax breaks and consumer subsidies, analysts said.

"The growing government spending, together with a recovery in private-sector investment, may have helped investment growth maintain a high level in May," said He Zhenhua, an analyst at Shenyin Wanguo Securities Co.

Meanwhile, consumer prices and producer prices, two gauges of inflation, were likely to remain in negative territory for the month.

"The Producer Price Index may have suffered a steepening year-on-year decline," said Morgan Stanley's Wang.

"The Consumer Price Index could have staged a milder contraction, and we believe that price indexes will find bottom in the coming months."

Wang said that the PPI probably fell 7 percent in May on an annual basis, down from 6.6 percent in April, while CPI may have retreated 1.4 percent in May, compared with a 1.5 percent decline a month earlier.


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