China’s economy is presenting a complex and often contradictory picture, as recent data reveals a nuanced landscape influenced by internal pressures and global trade dynamics. While factory output has slowed, retail sales have shown surprising resilience, painting a mixed outlook for the world’s second-largest economy amidst a fragile truce in its trade relationship with the United States.
Divergent Trends: Factory Output Slows, Retail Sales Rebound
The latest figures from the National Bureau of Statistics highlight a divergence in key economic indicators. China’s factory output growth hit a six-month low in May, expanding by just 5.8% year-on-year. This marked a deceleration from April’s 6.1% and fell short of analysts’ expectations, representing the slowest growth since November of the previous year. This deceleration in industrial output reflects ongoing pressures, including the lingering effects of U.S. tariffs.
In contrast, China’s retail sales delivered an unexpected boost, rising by a robust 6.4%, significantly outpacing April’s 5.1% increase and analyst forecasts. This represents the fastest growth in retail consumption since December 2023, primarily driven by strong spending during the Labour Day holiday and the positive impact of a government-subsidized consumer goods trade-in program. An extended “618” online shopping festival also contributed to this surprising uptick in Chinese consumption.
Trade Tensions and Deflationary Headwinds
Despite the recent trade truce between the U.S. and China, the impact of previous tariff onslaughts is still evident. While China’s total exports expanded by 4.8% in May, outbound shipments to the United States saw a sharp 34.5% plunge, marking the steepest decline since February 2020. This stark contrast underscores the vulnerability of China’s external trade to geopolitical friction. Compounding these challenges, China’s deflationary pressures deepened further last month, signaling underlying weakness in pricing power within the economy.
Property Sector Struggles and Investment Caution
Beyond trade, chronic structural headwinds persist. The China property sector remains a significant concern, with new home prices continuing a two-year stagnation, showing no clear signs of reversal. This enduring weakness in housing feeds into broader economic sentiment. Fixed-asset investment, a key driver of growth, expanded by only 3.7% in the first five months of the year, slightly below expectations and slowing from the January-to-April period. As one economist noted, stimulus measures appear effective where applied (like home appliance sales), but sectors without direct intervention, such as property development, continue to struggle.
Outlook and Policy Response
Beijing has responded to these challenges with a package of stimulus measures, including interest rate cuts and significant liquidity injections, aimed at cushioning the economy from the impact of U.S. tariffs. Encouragingly, these trade woes have not yet fully translated into employment figures, with the urban jobless rate nudging down to 5% in May.
However, analysts remain cautious about the overall China economy outlook. Despite the government’s target of roughly 5% growth for the year, many warn that “the US-China trade truce was not enough to prevent a broader loss of economic momentum last month.” With tariffs still high, and fiscal support potentially waning, coupled with persistent structural headwinds, economic growth is projected to slow further through the remainder of the year. The future trajectory of China’s economic momentum will heavily depend on the effectiveness of continued stimulus, the evolution of trade relations, and the government’s ability to address deep-seated sectoral challenges.
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