China’s economic activity remained largely flat in May

June 27, 2024

Trusted Insights for What’s Ahead™

• Status of China’s Economy—signs of moderation in May
  The month saw better performance in several key indicators thanks to stronger domestic and external demand, continued government stimulus, and favorable base effects. However, this is not indicative of a significant and lasting pick-up in growth: the real estate sector has yet to bottom out from its downturn and consumer confidence remains weak. While there are no signs of a significant revival, there are also no indications of a significant slowdown in the coming months. Indeed, the majority of the RMB 1 trillion that was earmarked for special treasury bonds with ultra-long maturities has yet to be issued, so we expect robust manufacturing and infrastructure investment in H2. Authorities are also progressing the implementation of the RMB 300 billion relending program for the acquisition of unsold housing units; and it is expected that the top leadership will announce more measures to address the property malaise at the CPC Third Plenum, on 15-18 July. Coupled with this, the stronger-than-expected growth in Q1 (5.3%) means that China is likely to achieve this year’s official growth target of “around 5%”. We therefore maintain our 2024 growth forecast at 5.0%.
• Investment Trends: There was a slowdown in infrastructure and property, but a resilience in manufacturing
  Fixed asset investment (FAI) decelerated to 4.0% y-o-y in Jan-May, down from 4.2% in Jan-Apr, driven by a slowdown in infrastructure investment and the ongoing contraction of property investment. In comparison, manufacturing investment remained robust. Looking forward, infrastructure and manufacturing investment will likely accelerate driven by increasing proceeds from the issuing of special treasury bonds.
• Consumption Trends: Retail sales improved in May, but consumer confidence remains weak
  Growth in retail sales accelerated to 3.7% y-o-y in May, up from 2.3% in April, largely driven by an increase in travel-related spending over the May Day holiday, and by a rise in online sales during the annual 618 online shopping festival, which started in mid-May. The momentum is not likely to carry over the coming months. Overall, Chinese consumers are more risk-averse and price-sensitive than before, and this will likely continue being the case so long as the underlying factors that are dragging down confidence levels are not addressed.
• Trade Trends showed a rebound in exports and a moderation in imports
  Exports accelerated to 7.6% y-o-y in May, from 1.5% in April, driven by a low base of comparison and surging demand from Southeast Asia. We still forecast economic growth in mature economies to remain modest; coupled with the impact of trade tensions between China and the US and EU, this means that external demand for China-made goods is not likely to see a significant upturn.
• Implications for Business: MNCs should be prepared for continued weakness in demand and consumption
  In the first five months, growth has mainly been driven by supply-side stimulus. This is not addressing the structural issues underlying ongoing confidence weakness, and risks exacerbating deflationary pressures and supply-demand imbalances. The CPC Third Plenum is expected to outline reforms to unlock domestic consumption and alleviate China’s property malaise; but these are likely to stop short of impacting national security considerations, including the building of technology self-reliance by developing “new productive forces.”