Overview

• Slowing trends for most of the key indicators in May largely reflected the impact of diminishing base effects. As China’s recovery from COVID-19 was well underway by May, year-on-year growth in May has slowed from the peaks seen at the start of the year. That said, China’s economic growth remains imbalanced – with an over-reliance on the industrial sector and exports, while consumption remains relatively subdued. Overall our outlook for China remains unchanged, with growth at 9.5% in 2021, before slowing to 5.8% in 2022 and 5.6% in 2023.
• China’s industrial production rose by 8.8% yoy in May, easing from the 9.8% yoy growth recorded in April. Base effects largely explain this slowing in growth – with the seasonally adjusted month-on-month growth unchanged in May.
• The slowing in fixed asset investment was larger than base effects alone – with real investment falling by 4.7% yoy (in part reflecting the surge in producer prices). The contraction in new credit issuance may be a driver, with nominal investment in infrastructure falling year-on-year in May.
• China’s trade surplus was marginally wider in May – totalling US$45.5 billion (compared with US$42.9 billion in April). This increase was driven by a slight month-on-month decline in imports (from high levels), with the value of exports essentially unchanged. China’s rolling twelve month surplus with the United States set a new record in May (the fourth straight month this has occurred) – rising to US$358.1 billion. Trade tensions between the two countries remain and a White House review of supply chain vulnerabilities (published on June 8) could reduce US demand for China’s exports in key areas (such as semi-conductors, large capacity batteries, critical minerals and pharmaceuticals).
• The uptick in retail prices in May meant that real retail sales increased by 10.1% yoy (from 15.8% yoy previously). When compared with same month in 2019, real retail sales increased by 6.1% in May, compared with 5.4% in April. This increase remains well below the growth recorded in the industrial sector – highlighting the ongoing imbalance in China’s economy.
• In the first five months of 2021, China’s new credit issuance totalled RMB 14.0 trillion, a decrease of 19.3% yoy. Bank lending remains the largest share of new credit issuance, increasing marginally (up 0.3% yoy) over this period to RMB 10.8 trillion. In contrast, non-bank lending plunged in the first five months of 2021 – down by 51% yoy to RMB 3.3 trillion.
• Despite the recent inflationary pressures – particularly for producer prices – the Governor of the People’s Bank of China (PBoC) has argued recently that inflation is under control and that monetary policy stability was a priority. The PBoC has held its main policy rate – the Loan Prime Rate – at 3.85% since April 2020, and Governor Yi’s comments are consistent with our view of stable rates for some time.

For further details, please see China’s economy at a glance – June 2021