China factory output slows but consumption offers bright spot

Trade tensions and tariffs

The United States and China recently agreed to a temporary truce in a standoff that saw tariffs surge to unprecedented levels, disrupting global supply chains. Nonetheless, the impact of this trade conflict was evident in the figures showing industrial production rose just 5.8 percent last month, falling short of the 6.0 percent predicted in a Bloomberg survey and marking the slowest growth since November.

Industrial production insights

The growth rate was also below the 6.1 percent recorded in April, as reported by the National Bureau of Statistics (NBS). Zichun Huang, China Economist at Capital Economics, noted that “weaker external demand was partly to blame,” adding that the contraction in industrial sales for export appeared to have deepened last month.

Retail sales growth

In contrast, retail sales—a key indicator of consumer demand—grew 6.4 percent year-on-year in May, the fastest increase since December 2023. This exceeded the 4.9 percent forecast in the Bloomberg survey and marked a significant rise from April's 5.1 percent increase. Lynn Song, Chief Economist for Greater China at ING, described this as an encouraging sign of recovery, attributing it to policy support efforts filtering through the economy.

Consumer confidence concerns

However, Song cautioned that a more sustainable recovery in consumption would likely require an improvement in consumer confidence, which remains closer to historical lows than averages. Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, stated that the retail sales figures "came as a surprise," possibly reflecting the impact of a government trade-in program for consumer goods.

Economic stability and challenges

The NBS indicated that the world's second-largest economy "maintained stability" last month as authorities intensified proactive macro policies. However, it also acknowledged that "there are still many unstable and uncertain external factors," emphasizing the need for stronger internal momentum to expand domestic demand.

Ongoing economic struggles

Beijing has faced challenges in sustaining strong growth since the pandemic, grappling with persistent issues such as a slump in domestic consumption and a debt crisis in the property sector. The NBS reported that commercial property prices in a representative group of 70 cities fell month-on-month in May, reflecting ongoing consumer caution.

Unemployment figures

The surveyed unemployment rate, closely monitored as millions of young people struggle to find suitable work, edged down to five percent in May from 5.1 percent the previous month.

Economic growth targets

China is targeting economic growth of around five percent this year, but this goal has been complicated by ongoing trade tensions with Washington. These tensions escalated into a grueling tit-for-tat tariff war following US President Donald Trump's inauguration in January. Although the two sides have agreed to pause retaliatory levies, a lasting deal has yet to be announced.