Chinese industrial production growth slowed sharply in May, reaching its lowest level in six months, while consumption unexpectedly surged. This contrast comes against the backdrop of a fragile trade truce between Beijing and Washington, as China continues to face persistent structural challenges, particularly in the real estate sector.

Reassuring figures

According to data released by the National Bureau of Statistics, industrial production rose 5.8% year-on-year in May, down from 6.1% in April and slightly below the consensus forecast of 5.9%. This is the slowest pace since last November.

Industrial production growth. Sources: National Bureau of Statistics of China, Trading economics

Conversely, retail sales jumped 6.4%, their strongest growth since December 2023. They increased just 5.1% in April, and analysts had expected growth to be limited to 5.0%.

This momentum was fueled by spending related to the Labor Day holiday, a government program to replace consumer goods, and the "618" online sales festival, whose early launch helped stimulate purchases.

These figures are more in line with the rebalancing of the Chinese economy that everyone has been wanting for many years. Exports (and therefore industrial production) have always been the main driver of the Chinese economy, while domestic demand (and therefore consumption) is relatively weak.

However, we must be cautious about today's statistics. While industrial production growth is slowing, it is also because the start of the year was particularly strong. Chinese factories have been running at full capacity to export as many goods as possible to the United States before the tariffs came into effect.

Headwinds

Since the beginning of the year, consumption and industrial production statistics have been solid overall, raising hopes for growth close to the target set by the authorities for 2025 (5%).

Nevertheless, several headwinds could slow down the Chinese economy. First, Donald Trump's trade war. This is something of a bull in a china shop - for China - even though, at this stage, the country is managing to cope. Exports to the United States have indeed collapsed following the introduction of tariffs (-34.5% in May). However, this decline has been offset by an increase in exports to other countries, particularly in Southeast Asia. As a result, total exports rose by 4.8% in May.

Another factor weighing on activity is real estate. For several years, China has been embroiled in a real estate crisis which, given the sector's weight in GDP, has contributed to the sharp slowdown in post-COVID growth.

Although there have been signs of stabilization in recent months, the decline in prices accelerated again in May. New real estate prices fell by 0.2% over the month, and existing real estate prices fell by 0.5%, the sharpest decline in the last seven months.

However, real estate accounts for between 60% and 70% of household balance sheets. Until prices stabilize, it is difficult to hope for a significant improvement in sentiment and, therefore, a sustained rebound in consumption.