China's consumer spending and investment have dropped to levels not seen since the pandemic, exposing ongoing risks to the economy despite a deescalation in tensions around Iran and an export boom driven by artificial intelligence.
Retail Sales and Investment Decline
Retail sales fell 0.6% in May from a year earlier, marking the first decline since the reopening from COVID lockdowns in late 2022 and worse than forecast. Home prices dropped at a faster pace, and fixed-asset investment shrank 4.1% in the first five months compared to the same period last year, according to data from the National Bureau of Statistics.
Industrial Production Rises
In contrast, industrial production climbed 4.5% in May, up from 4.1% in April and slightly above expectations. The surveyed urban jobless rate eased to 5.1%.
“While there are pockets of strength in tech and export-related industries, the broader economy is still struggling,” said Lynn Song, chief economist for Greater China at ING Bank NV. “This could eventually add pressure on policymakers to ease policy.”
Two-Speed Economy
An export boom fueled by artificial intelligence has created a new economic imbalance in China, boosting production while domestic consumer spending sags under a housing crisis and fragile job market. Without stronger domestic demand, the risk of a deeper slowdown persists.
Bloomberg Economics noted: “May’s activity data underscore a widening two-speed economy. The supply side remains robust, driven by faster-than-expected expansion in exports and AI tech sectors. The demand side has faltered, with consumption and private non-tech investment plummeting.”
Data Accuracy Questions
The slump in retail sales and investment has raised questions about their accuracy in gauging broader economic health. The services production index, which rose to 4.4% year-over-year in May, correlates more closely with GDP growth than retail sales, which largely cover goods, according to Yu Song, chief China economist at UBS Securities. Inconsistencies in fixed-asset investment data may exaggerate weakness.
“Second-quarter GDP data looks to be weak, but not quite as weak as one would expect from April data,” Song told Bloomberg Television. Some analysts estimate growth near 4% in April, below the government's full-year target of 4.5% to 5%.
The yuan weakened in offshore trading after the data release, and the Hang Seng China Enterprises Index fell about 1.3%.
