China’s industrial output in May fell short of expectations, highlighting ongoing challenges in the property sector despite government efforts to bolster economic growth. Retail sales outperformed forecasts due to holiday spending, but overall economic data released on Monday painted a subdued picture, underscoring the uneven recovery of the world’s second-largest economy.
According to data from the National Bureau of Statistics (NBS), industrial output in May grew by 5.6% compared to the previous year, down from April’s 6.7% and below analysts’ expectations of 6.0%. On the other hand, retail sales, a key indicator of consumer activity, increased by 3.7% year-on-year in May, up from a 2.3% rise in April, driven by a holiday period. Analysts had anticipated a 3.0% expansion.
Goldman Sachs analysts noted, “May activity data and our real-time indicators for the first half of June indicate significant divergences across sectors – strong exports and manufacturing, relatively stable consumption, and subdued property activity.”
Fixed asset investment rose by 4.0% in the first five months of the year compared to the same period in 2024, slightly below the expected 4.2% increase. Manufacturing investment showed robust growth of 9.6% during this period, supported by China’s focus on quality-driven growth through technological advancements.
However, economists cautioned about escalating trade tensions with Western countries, particularly concerning China’s capacity in solar and electric vehicles. Private sector investment grew by only 0.1% from January to May, reflecting lingering uncertainties among private enterprises, while state sector investment surged by 7.1% in the same period.
Following the release of mixed economic data, Asian markets, including China’s CSI300 index, showed a mostly weaker trend, slipping by 0.2%.
Exports Drive Industrial Growth
Exports were pivotal in bolstering China’s economy in May, particularly in sectors such as steel and aluminum, which saw significant output increases. Zhao Peng Xing, senior China strategist at ANZ, highlighted that while exports drove industrial growth and manufacturing investment, weaknesses in the real estate market continued to dampen household consumption and overall investment sentiment.
Economic Challenges Persist
Despite strong export performance, China faces challenges from a slumping property market, high local government debt, and deflationary pressures. These factors contribute to uneven economic growth, prompting calls for additional fiscal and monetary policy support to sustain momentum.
Monetary Policy Outlook
The People’s Bank of China maintained its key policy rate unchanged amid concerns over narrowing interest margins and a weakening currency. Zhou Hao, chief economist at Guotai Junan International, anticipates potential cuts to the Loan Prime Rate (LPR) to support household mortgage loans. In contrast, Citi’s chief China economist, Yu Xiangrong, forecasts a 20-basis-point reduction in policy rates later this year, though no LPR cut is expected in June.
Property Market Challenges
The property sector remains a significant drag on China’s economic prospects, with investment declining sharply by 10.1% year-on-year from January to May. Falling new home prices, down 0.7% in May compared to April, underscore ongoing challenges exacerbated by regulatory measures and broader economic trends.
Government Response and Economic Targets
Despite these challenges, China reported a faster-than-expected 5.3% economic growth in the first quarter. However, achieving the government’s annual growth target of approximately 5% remains ambitious amid persistent property market woes. Government initiatives, including a re-lending program for affordable housing, aim to stabilize the market, although full effects may take time.
Employment and Policy Measures
The job market in China remained stable, with the nationwide survey-based unemployment rate holding steady at 5.0% in May. Beijing continues prioritizing job creation through significant projects, domestic demand promotion, and commitments to bolster growth through increased fiscal stimulus measures.
Deteriorating Property Market Data
China’s economy expanded by a faster-than-expected 5.3% in the first quarter. Still, analysts caution that achieving the government’s annual growth target of approximately 5% may prove ambitious due to persistent challenges in the property sector.
- Declining Property Investment: Property investment plummeted by 10.1% year-on-year from January to May, worsening from a 9.8% decline in the preceding January-April period.
- Falling Home Prices: In May, new home prices dropped by 0.7% compared to April, marking the 11th consecutive month of decline and the sharpest drop since October 2014, according to Reuters calculations based on NBS data.
- Policy Measures and Market Adjustment: The central bank recently introduced a lending program to boost unsold housing inventory sales. In a media briefing, NBS spokesperson Liu Aihua acknowledged that the property market is undergoing necessary adjustments, and the full impact of policy measures is expected to materialize over time.
- Impact on the Economy: The property sector, which previously contributed around a quarter of China’s economic output, faces challenges from regulatory tightening, demographic shifts, and broader economic pressures. Government initiatives, including easing mortgage rules, aim to support homebuyers amid tepid domestic demand, which has also constrained consumer prices and financial confidence.
- Financial Indicators: Despite efforts to stabilize the economy, new bank lending rebounded less than anticipated in May, and key monetary indicators reached historic lows.
Employment and Policy Response: The overall job market remained stable, with the nationwide survey-based unemployment rate at 5.0% in May. Beijing continues to prioritize job creation through significant infrastructure projects, stimulate domestic demand, and pledge increased fiscal stimulus to bolster economic growth.
Mixed Economic Indicators in May
According to data from the National Bureau of Statistics (NBS), China’s industrial output in May grew by 5.6% compared to the previous year. This represents a slowdown from April’s 6.7% growth and falls short of the 6.0% increase analysts expect in a Reuters poll.
However, retail sales, a key indicator of consumer spending, rose by 3.7% year-on-year in May, up from a 2.3% increase in April. This was the fastest growth since February and exceeded analysts’ expectations of a 3.0% rise, driven by a five-day public holiday earlier in the month.
Goldman Sachs analysts noted in a report, “May activity data and our high-frequency trackers for the first half of June suggest significant cross-sector divergences remain in the economy—strong exports and manufacturing activity, relatively stable consumption, and still-depressed property activity.”
Fixed asset investment increased by 4.0% in the first five months of 2024 compared to the previous year’s period, slightly below the anticipated 4.2% rise. This marks a decline from the 4.2% growth recorded from January to April.
China’s Factory Output Disappoints
According to the National Bureau of Statistics (NBS), China’s industrial output grew by 5.6% in May compared to the same month last year. This growth rate represents a deceleration from April’s 6.7% increase and falls short of the 6.0% rise forecast by analysts in a Reuters poll. The slowdown in industrial output highlights the ongoing challenges facing China’s manufacturing sector, which is grappling with weakened global demand and internal economic pressures.
Several factors contribute to the disappointing factory output figures. The global economic environment remains uncertain, with trade tensions and shifting supply chains affecting export demand. Additionally, China’s efforts to transition towards a consumption-driven economy and reduce reliance on heavy industry have also played a role in tempering industrial output growth. While crucial for long-term economic sustainability, this transition has introduced short-term volatility in manufacturing performance.
Moreover, structural issues within the industrial sector, such as overcapacity in specific industries and production process inefficiencies, continue to hamper growth. The government has been implementing measures to address these issues, but progress has been gradual. The impact of these structural adjustments is reflected in the slower-than-expected growth figures for May.
Property Sector Stuck in Doldrums
The property sector, a significant pillar of China’s economy, remains challenging. From January to May, property investment declined by 10.1% year-on-year, deepening from a 9.8% drop recorded in January-April. This continued decline underscores the real estate market’s persistent challenges, which have been hit hard by regulatory tightening and broader economic pressures.
NBS data show that new home prices in May decreased by 0.7% compared to April, marking the 11th consecutive month of decline and the steepest drop since October 2014. The ongoing decline in home prices highlights the lack of confidence in the property market and the reluctance of potential buyers to invest amid an uncertain economic outlook.
The central bank’s recent introduction of a lending program to boost sales of unsold housing inventory has yet to produce significant results. The National Bureau of Statistics spokesperson, Liu Aihua, acknowledged that the property market is undergoing a necessary adjustment period and will take time for policy measures to take full effect.
The property sector, which previously accounted for around a quarter of China’s economic output, has been significantly impacted by regulatory crackdowns intended to curb excessive speculation and financial risk. While necessary to ensure long-term stability, these measures have contributed to the current slowdown. Demographic shifts, such as an aging population and changing household formation patterns, further complicate the property market’s recovery.
Despite the government’s efforts to support the sector through initiatives like easing mortgage rules, domestic demand remains tepid. This lackluster demand has kept consumer prices low and constrained economic confidence. Additionally, new bank lending in May rebounded less than expected, and critical monetary indicators hit record lows, reflecting the ongoing challenges within the financial system.
Overall, the property sector’s struggles are a significant drag on China’s broader economic recovery, necessitating continued policy support and structural reforms to restore confidence and drive sustainable growth.
Frequently Asked Question
Why did China’s industrial output growth slow down in May?
China’s industrial output growth slowed to 5.6% in May from 6.7% in April, missing analysts’ expectations of a 6.0% increase. This slowdown is attributed to weakened global demand, internal economic pressures, and structural adjustments in the manufacturing sector aimed at transitioning to a consumption-driven economy.
What factors are contributing to the challenges in China’s property sector?
The property sector faces challenges, including regulatory tightening to curb speculation, high local government debt, and broader economic pressures. Demographic changes and a lack of confidence among potential buyers further exacerbate the situation, leading to declining property investment and falling home prices.
How is the government addressing the slowdown in the property market?
The government has introduced several measures to support the property market, such as easing mortgage rules and implementing a lending program to boost sales of unsold housing stock. However, it will take time for these measures to show their full impact as the market undergoes a necessary adjustment period.
What impact does the property sector’s performance have on China’s overall economy?
The property sector previously accounted for around a quarter of China’s economic output. Its current struggles significantly drag on the broader economy, affecting consumer confidence, investment, and domestic demand. This, in turn, impacts related industries and overall economic growth.
Are there any positive signs in China’s economic data for May?
Yes, retail sales in May rose 3.7% year-on-year, up from a 2.3% increase in April. This growth exceeded analysts’ expectations and was driven by a five-day public holiday, highlighting resilience in consumer spending despite broader economic challenges.
What are analysts’ expectations for China’s economic growth shortly?
Analysts have mixed expectations. While some, like Goldman Sachs, note significant divergences across sectors—solid exports and manufacturing versus weak property activity—others foresee potential policy rate cuts to support economic growth. Given the current challenges, achieving the government’s annual growth target of around 5% remains ambitious.
How is the job market in China amid these economic challenges?
The job market in China has remained relatively stable, with the nationwide survey-based unemployment rate holding steady at 5.0% in May. The government continues prioritizing job creation through significant infrastructure projects and other initiatives to promote domestic demand and bolster economic growth.
Conclusion
China’s recent economic data paints a picture of mixed fortunes. While industrial output growth has disappointed, falling short of expectations and slowing from previous months, pockets of resilience, particularly in retail sales, have shown stronger-than-anticipated growth. The persistent challenges in the property sector, characterized by declining investment and falling home prices, continue to weigh heavily on the overall economic outlook. Government measures, including easing mortgage rules and introducing lending programs, aim to stabilize the property market and spur economic growth.
