Theme of the Day: Disappointing May and YTD Chinese domestic data

Chinese retail sales and fixed asset investment growth both plummeted to the lowest levels since the pandemic as domestic demand remains soft. But industrial production remains a bright spot, supported by strong external demand. Disappointing Chinese domestic data could add to pressure for fresh stimulus. Fixed asset investment continues to plummet amid uncertainty. Fixed asset investment dropped to -4.1% YoY ytd, down from -1.6% YoY ytd in Apr. This was well below forecasts of -2.3% and marked the lowest level since 2020. Private sector investment continued to lag heavily, down -7.1% YoY ytd, compared to a smaller drop of -0.4% YoY ytd for public investment. Decision makers may have preferred caution amid global geopolitical uncertainty, adding to an already weak investment environment. By industry, there was substantial divergence. We continued to see solid investment into sectors such as rail, ships, and aerospace (23.6%), textiles (10.8%), transportation (7.1%), and computer and electronics manufacturing (6.7%), which are currently benefiting from strong external demand. Hi-tech investment continued to grow at 4.5% YoY ytd. However, most other industries saw negative investment growth. Industrial production remains the lone bright spot. Industrial production grew by 4.5% YoY in May, up from 4.1% in Apr. It was the lone indicator this month that came in stronger than forecasts of 4.4%. Industrial production continues to be supported by strong external demand, and the data show that the outperforming sectors are the same ones that see strong export growth. Autos (8.3%), rail, ships, and aerospace (7.4%), and computer and electrical equipment manufacturing (17.0%) all solidly outpaced headline growth. Property prices continued to see mild decline. China's National Bureau of Statistics released its 70-city sample of property prices for May. New home prices fell by -0.20% m-on-m, while used home prices dipped by -0.26%. Looking at the city-level breakdown, we had a slightly softer read in May than last month's data, but positive momentum in tier-1 and tier-2 cities generally continued. This is an important development toward eventually finding a trough in property prices. In the primary market, 18 cities saw prices stabilise or rise in May (up from 21 in Apr), versus 13 in the secondary market (down slightly from 16 in Apr). It remains too early to confidently call a bottom for the property market, as prices continue to decline, and inventory levels remain high. Property investment, already down -16.2% YoY ytd, will remain a major drag on growth. Retail sales growth fell into negative territory in May. China's retail sales growth fell to -0.6% YoY in May, down from 0.2% in Apr. The data was in line with forecasts, but weaker than market consensus of -0.2%. It’s the lowest level since pandemic-skewed 2022. We continued to observe the impact of the trade-in policy on related categories, which dragged down overall consumption. Beneficiary categories such as household appliances (-15.6%), autos (-16.1%), and furniture (-8.7%) saw outsized drops on the month. We’re now seeing the flip side of frontloading consumption. Consumer confidence remains quite soft in China, as wage growth slows and household balance sheets continue to be impacted by the property price downturn. This year's smaller stimulus push is also leading to disappointing year-to-date retail sales growth. Given the prominent role of boosting domestic demand in China's Five-Year Plan, more measures to boost consumption could be rolled out moving forward.