China Galaxy Securities: May PMI shows signs of stabilization, external environment uncertainty still exists.

China Galaxy Securities released a research report stating that in May, China's manufacturing PMI slightly rose to 49.5, although it is still in the contraction zone, signs of stabilization have emerged. The temporary easing of tariffs between China and the US has led to a rebound in some foreign trade orders, coupled with the continuous injection of medium and long-term liquidity by the central bank, market expectations for further policy enhancement have increased. At the same time, there may be a significant shift in US trade policy. On May 28, the US International Trade Commission ruled that the "Liberation Day" tariffs implemented by the Trump administration were illegal and issued a permanent injunction to suspend the policy. Although the White House plans to appeal, this move is expected to alleviate the impact of tariffs on the economy in the short term. Overall, China's manufacturing industry is showing signs of recovery under policy support, but the external environment remains uncertain, and it is necessary to continue monitoring the evolution of China-US trade policies and their potential impact on the global economy. The main points of China Galaxy Securities are as follows: Domestic macro - demand side (1) Consumption: Travel continues to be stable, and retail sales of passenger vehicles remain relatively high. As of May 30th, the year-on-year growth rate of subway passenger traffic in May was 2.23%, and the month-on-month growth rate was -3.89%. As of May 27th, the total number of flights executed by the Flight Butler statistics in May was 426,000, with a month-on-month increase of 1.6% and a year-on-year increase of 5.0%; retail sales of passenger vehicles maintained a stable and upward trend, according to the China Association of Automobile Manufacturers, 1-25 The market retail sales of 1.358 million vehicles in May increased by 16.9% year-on-year compared to the same period last year, an increase of 5.4% from the previous month. (2) External demand: High-frequency data shows that external demand continues to decline. As of May 30th, the average daily value of the Baltic Dry Index (BDI) in May was 1342.3, with a month-on-month increase of 1.7% and a year-on-year decrease of 29.0%, continuing to decline; the average value of China's container shipping index in May was 1109.1, a decrease of 0.34% from April, and a year-on-year decrease of 18.4%, showing a slight improvement compared to the previous week. Domestic macro - production side: Significant improvement in industrial production in May At the end of May, steel production generally declined, with the blast furnace operating rate rising by an average of 0.6 percentage points to 84.2%; the coking plant operating rate increased by 1.6 percentage points to 75.19%; and the wire rod operating rate increased by 1.99 percentage points to 47.33%. Real estate construction has seen a slight increase but still remains sluggish, with the screw steel operating rate rising by an average of 0.58 percentage points to 42.3%; the asphalt operating rate rising by 2.24 percentage points to 30.43%. Consumer manufacturing remains stable, with the semi-steel tire operating rate for passenger vehicles remaining at 78.25% as of May 29th, with no significant change from the previous week; the all-steel tire operating rate slightly decreased by 0.16 percentage points to 64.8%. Chemical industry production generally declined, with the soda ash operating rate decreasing by an average of 6.72 percentage points to 81.3%, and the PTA operating rate decreasing by 2.46 percentage points to 75.99%; the refinery operating rate remained low, recording 46.82% as of May 29th. Price performance (1) CPI: Pork prices continue to fall, while fruit and vegetable prices fluctuate. As of May 30th, the average wholesale price of pork decreased by 0.30% on a weekly basis, and the settlement price of live pig futures fell by 4.04%. With the approaching of the Dragon Boat Festival, there is short-term consumption support, and as the weather gets hotter, the supply of pigs continues to increase, leading to a decrease in the average weight of pigs slaughtered and a continuous high-level fluctuation in the price of piglets. As for fruits and vegetables, the average wholesale prices of 28 key monitored vegetables rose by 1.27%, and the average wholesale prices of 7 key monitored fruits rose by 0.54%. The settlement price of apple futures decreased by 0.05%. With the concentrated listing of summer seasonal fruits, the demand for apples is seasonally declining, the sales of apples have significantly slowed down before the Labor Day, but the total inventory this season is low, coupled with good progress in destocking in the previous period, the current inventory level is at a historically low level, significantly supporting the spot prices. In addition, egg prices fell by 1.75% on a weekly basis. (2) PPI: Crude oil prices continue to fall, and prices of black products are falling across the board. As of May 30th, oil prices continued to decline this week, with WTI and Brent crude oil prices falling by 1.01% and 1.00% respectively. As for black products, as of May 30th, prices of black products fell across the board this week, with a 6.98% decrease in coking coal prices, a 7.94% decrease in coke prices, a 2.34% decrease in iron ore prices, and a 2.72% decrease in wire rod prices. Prices of non-ferrous and other industrial products have varying increases and decreases, with aluminum prices declining by 0.01%, copper prices declining by 0.17%, cement prices declining by 2.00%, and glass prices rising by 0.39%. Domestic macro - fiscal: Overall slowdown in government bond issuance this week, with accelerated issuance of new special bonds There were no new special national bonds issued this week. As of May 31, 2025, the progress of local special bonds (including 2 trillion restructuring bonds) has reached 48.9%, with an additional 5 billion in special refinancing bonds issued, and the issuance progress of special bonds (excluding restructuring bonds) has reached 35.4%, a significant acceleration compared to last week. The progress of local general bonds issuance is 56.7%. The progress of general national bond issuance is 38.8%. Currently, the central bank's liquidity support is sufficient, and it is expected that new types of policy financial instruments will land in the second quarter. Domestic macro - investment High-frequency data shows a marginal cooling of infrastructure investment this week, with the asphalt operating rate dropping for two consecutive weeks to 27.7%, and prices of cement, screw steel, and high-strength wire have all receded. Cement is mainly used in water conservancy, public facilities, and other projects, while asphalt mainly used in local road construction, and screw steel and high-strength wire correspond to housing construction and manufacturing, supply-side price factors continue to hinder investment. In terms of real estate, the sales area of commercial housing in 30 large and medium-sized cities in May increased by 12.8% compared to April, indicating a rebound in real estate sales in May, but the sustainability still needs to be further observed. In the future, it is necessary to pay attention to whether there will be targeted support for urban renewal funding through incremental policy tools. Currency and liquidity Although net funds were retrieved through buy-back reverse repurchases this month, the central bank's intention to maintain sufficient liquidity is evident from the overall allocation of various tools with different maturities, and it shows a preference for longer-term investments. This month, there was a net withdrawal of 200 billion yuan from buy-back reverse repurchases, with a net injection of 300 billion yuan for 6-month maturities and a net withdrawal of 500 billion yuan for 3-month maturities. The central bank implemented a 50 basis point reserve requirement cut this month, releasing about 1 trillion yuan in medium and long-term liquidity. The net injection of MLF this month was 375 billion.In terms of liquidity injection from various instruments this month, the central bank is clearly maintaining an intention of ample liquidity and showing a tendency to inject liquidity with longer maturities. This state will continue in the future. The central bank did not conduct open market government bond transactions this month. It remains to be seen when it will resume such transactions, but once it does, it will be a signal of looser monetary policy.This week, the net injection of open market operations was 656.6 billion yuan, with the People's Bank of China increasing liquidity injections at the end of the month to meet the seasonal increase in liquidity demand. The money market interest rates showed a seasonal increase, with SHIBOR007 and DR007 at 1.6170% (+7BP) and 1.6645% (+8BP), respectively. The average daily trading volume of interbank pledged repo transactions decreased compared to last week, from 6.7 trillion yuan to 6.5 trillion yuan. The government bond yield curve remained flat, with the 30-year bond yield slightly rising to 1.8960% (+1BP); the 10-year bond yield fell below 1.7% to 1.6712% (-5BP); and the 1-year bond yield was at 1.4452% (+1BP). The 1-year issuance rate for interbank certificates of deposit of state-owned banks rose to 1.70% (+2BP). Overseas macroeconomic and market updates - Legal challenges to Trump's tariffs under the IEEPA, with a possible transition to other measures; economic data supporting expectations of interest rate cuts slightly heating up Policy updates: (1) On May 28, the U.S. International Trade Court ruled that the tariffs levied by the Trump administration using the International Emergency Economic Powers Act (IEEPA) were illegal, and ordered them to be lifted within 10 days; the next day, the Federal Court of Appeals granted the Trump administration's stay application, allowing the tariffs to continue temporarily. However, the Court of Appeals requested that the plaintiffs challenging the tariffs submit their arguments by June 5, and the U.S. Department of Justice must respond by June 9. There is a high probability that the case will ultimately be decided by the Supreme Court. Overall, Trump's strategy of imposing tariffs on a large scale using the IEEPA is likely to continue to face legal challenges this year, leading to a possible transition to temporary measures under various sections such as 301, 232 investigation, or 201, 122, 338. (2) Trump met privately with Federal Reserve Chairman Powell at the White House and stated that it would be a "mistake" if the Federal Reserve does not cut interest rates. The Fed Chair's office earlier stated in a press release that the meeting was at the President's invitation and discussed economic issues including growth, employment, and inflation. Powell continued to emphasize the Fed's policy independence. The minutes of the May meeting also showed a slightly more hawkish stance since recent hard data and staff forecasts reflected concerns about a recession due to tariffs. (3) After Trump announced in early June that steel tariffs would be raised from 25% to 50%, the European Commission expressed regret in a statement on May 31, stating that the EU is prepared to take retaliatory measures. (4) There has been limited progress in the Russia-Ukraine negotiations, with conflicts escalating at the margins. Russia's conditions for ending the war may include a written commitment from NATO to never expand eastward. In terms of economic data, there are signs of slowing down in the United States: (1) In April, non-defense capital goods orders (excluding aircraft) in the United States saw a monthly decline of -1.3% and a year-on-year drop of 19.1%, reflecting a weakening in business equipment spending in the second quarter under increased tariff pressures, indicating a further decline in investment in the second quarter. (2) The number of initial jobless claims in the United States increased by 14,000 to 240,000 in the previous week, exceeding expectations of 230,000, indicating a potential slight increase in the unemployment rate in May. Meanwhile, dragged down by non-financial industries, U.S. corporate profits fell by the largest margin in over four years in the first quarter, and the impact of tariffs on "wages-consumption" and corporate profits may further manifest in the future. (3) U.S. April PCE inflation increased by 2.1% year-on-year and slightly lower than expected, with core inflation falling to 2.5%. The pressure of tariffs on consumer prices has not been clearly reflected, but it may also indicate that the one-time inflationary impact of tariffs is limited, which would support a marginal increase in the expectation of an interest rate cut by the Federal Reserve. (4) Total U.S. imported goods in April amounted to $276.097 billion (down from $344.470 billion previously), significantly lower, with the overall U.S. composite tariff rate rising from around 2.4% to over 6.3% in April. The reduction in import value is beneficial for stabilizing the U.S. GDP in the second quarter. Overall, this week's economic data suggests that the negative impact of tariffs on the economy began to gradually show in April and May, slightly strengthening the market's expectation of an interest rate cut. The uncertainty related to tariffs may further exacerbate the impact on the economy and corporate profits. Risk warning: Risks of policy implementation falling short of expectations; risks of consumer confidence not recovering as expected.