Overview

• Overall, most of the key economic data fell short of market expectations in May – highlighting continued softness in China’s economy. In particular, subdued retail sales (when looking though the volatility) and inflation data point to ongoing weakness in domestic demand. While there has been fresh talk of stimulus via easing monetary policy and greater support for real estate, it is not clear that such measures would have a material impact on growth in the near-term. Our economic forecasts are unchanged this month – with China’s economy expanding by 5.6% in 2023, 4.5% in 2024 and 4.8% in 2025 – however the current softness highlights some downside risk in the short-term.
• China’s industrial production growth was somewhat slower in May – increasing by 3.5% yoy (down from 5.6% yoy in April). It is worth noting that these respective growth rates were impacted by base effects – with a sharp downturn in output in April 2022 (reflecting the lockdown in Shanghai and a range of other cities) followed by a modest upturn in May 2022.
• Slower growth in nominal fixed asset investment was partially offset by further declines in prices, meaning that our estimate of real investment increased by 5.1% yoy in May (down from 5.8% yoy previously). There remains a substantial divide between investment by China’s state-owned enterprises (SOEs) (which recorded robust growth) and private sector firms (where growth was negligible).
• China’s trade surplus narrowed in May, totalling US$65.8 billion (compared with US$90.2 billion in April). This reflected a month-on-month decline in exports, while imports trended slightly higher. Overall, exports to China’s major trading partners fell more rapidly than the total – down by 14.2% yoy – as the share of exports to these countries has continued to decline. In part, this reflects an increase in exports to Russia and other former Soviet Union countries in recent months, along with higher shipments to the Middle East and Africa in recent times.
• China’s retail sales growth slowed a little in May but remained strong –  with real sales increasing by 12.5% yoy (down from 18.3% yoy in April). That said, these growth rates have been inflated by base effects – reflecting the impact of COVID-19 lockdowns during the same period in 2022. Comparisons to pre-pandemic spending levels show little sign of the long awaited return of the Chinese consumer – consistent with the subdued inflation trends.
• Chinese authorities are attempting to boost lending via monetary easing. In March, the People’s Bank of China (PBoC) cut the Reserve Requirement Ratio (RRR) to free up additional funds for bank lending. This month there were 10 basis point cuts to the 7-day reverse repo rate (used to manage short term liquidity) and the Medium Term Lending Facility (MLF) rate, with similar cuts to the Loan Prime Rate (China’s main policy rate) anticipated.
• That said, there remains concerns around the strength of credit demand. The modest rebound in lending to households – driven by new mortgage issuance – appears to have run out of momentum, while lending to the business sector appears to have softened in recent months.

For further details, please see China’s economy at a glance (June 2023)