China's macro environment registered modest improvement in May, as the government's efforts to get planned infrastructure projects and residential investment back on track started to gain traction.

If this trend continues, and if exports don't collapse to the extent that millions of workers are sacked, continued policy fine-tuning, rather than a serious stimulus, should be enough to generate 8 percent GDP growth for the full year.

As we have explained, the two main reasons that Chinese economic growth is slowing are that 1) the central government has deliberately cooled the growth rate of spending on public infrastructure; and 2) the government has been discouraging the purchase of new homes, leading to a sharp slowdown in the growth rate of residential investment.

Last year, infrastructure and residential investment combined accounted for about 21 percent of GDP and 2.1 percentage points of 9.2 percent GDP growth.

Residential real estate investment clearly improved last month, rising 12.8 percent year on year compared to 4 percent in April. We don't yet have the data to calculate the growth rate of spending on infrastructure, but we assume this continued on the accelerating path seen since early 2012 as overall fixed asset investment ticked up to 19.9 percent year on year in May (vs. 19 percent in April), and because growth in investment spending by state-owned firms, the initial conduit for most infrastructure spending, rose to 11.1 percent from 10.3 percent in April. FAI by private firms also improved, rising 24.6 percent in May compared to 23.8 percent in April.

There are several factors behind the recovery in residential investment, which has come earlier than we'd anticipated. Residential completions are up 26.5 percent so far this year, compared to 17.5 percent for last year. This is probably due both to developers finishing pre-sold flats and the government making a renewed push to build social (low-income) housing.

Another important factor is that local governments have been easing enforcement of controls on new home sales, especially by first-time buyers who account for 58 percent of all sales. As a result, new home sales have slowly improved, down 9 percent year on year last month, compared to -13.4 percent in April and -15.2 percent in March.

However, we believe the government will continue to allow local governments to gradually relax enforcement of the policies which have slowed sales, albeit without fully lifting those controls. In the coming months we expect to see a steady, gradual rise in sales volumes and residential investment growth.