"If growth does not accelerate sufficiently to narrow the output gap, social stability risk may rise and eventually triggerThe National Bureau of Statistics noted the purchasing managers' index for large manufacturers came in at 50, while that of smaller manufacturers was lower. The index for services activity remained in expansionary territory at 54.5, but marked a second-straight month of decline.
"Insufficient demand could be the major concern now, and there are both cyclical and structural causes for it," they wrote, adding the "initial boost to the services sector from reopening could be fading." Citi economists also expect the People's Bank of China to cut its medium-term lending facility rates by 20 basis points and its reserve requirement ratio by 50 basis points by the end of the year.
"We reckon that the Chinese economy could be on the verge of a self-fulfilling confidence trap and believe decisive policy actions are needed," they wrote. "There could be limited room for fiscal easing from the budget and we expect structural easing efforts with more efforts from the central government and quasi-fiscal tools via policy banks," they wrote.
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