China’s latest activity data painted a mixed picture of the economy in May, with stronger factory output masking a sharp deterioration in domestic demand. Industrial production accelerated from 4.1% yoy to 4.5% yoy, beating market expectations of 4.2%y yoy and suggesting manufacturers continued to expand output despite slowing conditions elsewhere in the economy.
The more concerning developments came from consumption and investment. Retail sales dropped from 0.2% yoy to -0.6% yoy, marking the first year-on-year decline in more than three years.
Fixed-asset investment also weakened significantly, falling from -1.6% ytd yoy to -4.1% ytd yoy. The property sector remained a major drag, with real estate investment inflows down -16.2% in the first five months of the year. Manufacturing investment slipped into contraction for the first time since late 2020, while infrastructure spending also declined.
The divergence reinforces concerns that China’s growth model remains heavily reliant on production while domestic demand struggles to gain traction. In an unusually direct assessment, the statistics bureau described the imbalance between strong supply and weak demand as “acute.” The comments suggest policymakers may face increasing pressure to introduce measures aimed at supporting employment and household spending, particularly as investment activity continues to lose momentum.
| Indicator | Apr | May | Expected |
|---|---|---|---|
| Industrial Production Y/Y | 4.1% | 4.5% | 4.2% |
| Retail Sales Y/Y | 0.2% | -0.6% | 0.0% |
| Fixed Asset Investment YTD Y/Y | -1.6% | -4.1% | -2.0% |
