China’s industrial expansion slowed in May and retail spending beat forecasts, a sign that deep imbalances in the economic recovery may be easing at least a little.

Industrial production rose 5.6% in May from a year ago, the National Bureau of Statistics (NBS) said on Monday. That compares with April’s increase of 6.7%, and a median forecast of 6.2% in a Bloomberg survey. Retail sales accelerated, climbing 3.7% compared to a forecast of 3%.

The spending numbers offer some encouragement, after years in which Chinese households have been reluctant to shell out despite government efforts to boost consumption. China turned to export-led growth instead, as a factory boom helped offset the housing slump and kept economic growth on track. 

But that strategy faces growing uncertainties as major partners erect new trade barriers that threaten the export engine. Last week, the European Union followed the US by imposing hefty tariffs on Chinese electric cars.

Despite May’s consumer pickup, the overall picture remains a “pretty weak recovery”, said Michelle Lam, an economist for Greater China at Societe Generale SA. “It remains to be seen if the better momentum in retail sales is sustainable”, and the government will have to speed up infrastructure investments if it’s to hit the 5% growth target this year, she said.

The NBS also sounded a cautionary note in a statement accompanying the data release, pointing to trade headwinds among the “many challenges” still facing China’s economy. “The external environment is complex and grim now, and domestic demand remains insufficient,” it said.

Chinese stocks largely held on to their earlier losses, with the onshore benchmark CSI 300 Index down 0.2% as of 10.20am on Monday.

Investment in property development plunged 10.1% in the first five months of 2024 from a year earlier, after dropping 9.8% in the January-April period. Data published earlier on Monday also showed that the drop in home prices accelerated last month. Shares in Chinese developers slumped.

China’s overall fixed-asset investment rose 4% in January-May, down from 4.2% in the first four months - even though there’s been a pickup in government bond issuance to fund infrastructure spending. The urban jobless rate was 5%, the same as in April.

China’s central bank on Monday kept a key interest rate unchanged for the 10th straight month, as liquidity in the financial system remains ample amid weak credit demand, while the yuan still faces downward pressure with the US Federal Reserve reinforcing the high-for-longer message. 

China rolled out a programme in April that offers incentives for businesses and households to upgrade old machinery, in a bid to boost consumption. The People’s Bank of China is providing as much as 500 billion yuan (US$69 billion or RM325.14 billion) in cheap loans to 21 banks to encourage them to lend to technology start-ups and companies that carry out the upgrades. Beijing and local governments are offering a combined 11 billion yuan in subsidies to help consumers purchase new cars.

Late last month, China also unveiled a broad rescue package to prop up housing sales as a credit crisis was engulfing some of the country’s biggest real estate developers. It relaxed mortgage rules and encouraged local governments to buy unsold homes. Still, many investors and analysts caution that the financial incentives aren’t big enough, and trial programmes in several cities have shown that progress can be slow.

Subdued demand at home and the deteriorating foreign-trade environment are weighing on business confidence, discouraging companies from investing and driving some to move production overseas. Credit growth has been lacklustre, and the M1 money supply gauge contracted in May at the fastest rate in data going back to 1996.

In a survey of more than 400 top executives conducted by UBS Group AG over roughly a month through mid-May, firms reported weaker prospects for orders, revenue and margins compared to the same period of 2023. There was a drop in the share of respondents who plan to increase capital expenditure in the second half of this year.

Expectations of pricing power also worsened, “suggesting to us downward pressure in prices in many sectors and sustained deflationary pressures for the economy”, the bank’s economists including Wang Tao wrote. More than three-quarters of surveyed manufacturing exporters have plans to move some production overseas in the future, the highest reading since the survey started asking that question, they said.

  - Bloomberg