China faces uphill battle for recovery amid mixed economic data

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The Chinese economy has been lagging post-Covid, with weak consumer demand, persistent deflationary pressures and a contraction in factory activity.
China's economy has lagged post-Covid, with weak consumer demand, persistent deflationary pressures and a contraction in factory activity.

China grappled with multiple economic challenges in May, highlighted by disappointing industrial output growth that fell short of expectations.  

This underscored the difficulties facing policymakers amidst a severe downturn in the property market and fluctuating investor confidence in the world’s second-largest economy. 

The National Bureau of Statistics reported a modest 5.6 per cent year-on-year increase in industrial production, a drop from April’s 6.7 per cent and below the 6 per cent forecasted by economists.  

Concurrently, fixed asset investment increased by a marginal 4 per cent, slightly lower than the 4.2 per cent predicted by economists. On a brighter note, retail sales showed resilience with a 3.7 per cent rise, surpassing the anticipated 3 per cent and improving from April’s 2.3 per cent. 

However, the property sector faced substantial challenges as investment plunged by 10.1 per cent year-on-year from January to May, worsening from a 9.8 per cent decline in the previous four months.  

Despite these setbacks, the job market remained stable, with the nationwide unemployment rate holding steady at 5.0 per cent in May, unchanged from April.  

Retail sales, a crucial gauge of consumer spending, saw a notable uptick of 3.7 per cent in May, marking the fastest growth since February and accelerating from April’s 2.3 per cent increase. 

In a significant downturn for the housing market, official data revealed that China’s new home prices experienced their steepest decline in over nine and a half years.  

Despite government efforts to mitigate oversupply and support debt-laden developers, property market conditions continued to deteriorate.  

Prices fell by 0.7 per cent from the previous month, marking the 11th consecutive monthly decline and the sharpest drop since October 2014. On an annual basis, new home prices were down 3.9 per cent, compared to a 3.1 per cent decrease in April. 

Despite these economic challenges, China’s central bank maintained key interest rates as expected, renewed maturing medium-term loans, and withdrew liquidity from the banking system. 

“We continue to expect no LPR cut on June 20. For 24H2, we see a total of 20bps policy rate reduction, with the first 10bps cut in 24Q3, likely after the mid-year Politburo meeting (Jul 24 in 2023), and the other in 24Q4,” said Xiangrong Yu, China chief economist at Citi.