The latest activity data in China painted a mixed picture for the economy in May, as rising factory output masked a sharp deterioration in domestic demand. Industrial production accelerated from 4.1% y/y to 4.5% y/y, beating market expectations of 4.2% y/y, indicating manufacturers are continuing to expand production despite slowing conditions elsewhere in the economy.
The most worrying developments came from consumption and investment. Retail sales fell from 0.2% year-on-year to -0.6% year-on-year, marking the first year-on-year decline in more than three years.
Investment in fixed assets also declined significantly, falling from -1.6% since the beginning of the year to -4.1% since the beginning of the year. The real estate sector remained a major drag, with real estate investment inflows declining by -16.2% in the first five months of the year. Manufacturing investment slid into contraction for the first time since late 2020, while infrastructure spending also fell.
This discrepancy reinforces concerns that China’s growth model remains too dependent on production while domestic demand struggles to gain momentum. In an unusually direct assessment, the Census Bureau described the imbalance between strong supply and weak demand as “severe.” The comments suggest that policymakers may face increasing pressure to introduce measures aimed at supporting employment and household spending, especially as investment activity continues to lose momentum.
| index | April | maybe | expected |
|---|---|---|---|
| Industrial production Y/Y | 4.1% | 4.5% | 4.2% |
| Retail sales Y/Y | 0.2% | -0.6% | 0.0% |
| Fixed asset investment since the beginning of the year Y/Y | -1.6% | -4.1% | -2.0% |
