MNI: Mixed China May Retail, Industrial Data Shows Policy Need

China’s industrial output made a surprise rebound that can carry momentum if Covid-19 curbs in Shanghai and other cities continue an easing trend, but weak retail sales showed the need for more domestic policy steps to stimulate overall demand and revive economic growth, according to analysts.

On the bright side, industrial output and consumption recovered from two-year lows in April as Covid-hit areas emerged from lockdowns. Investment, the main growth driver this year, remained uplifted amid the government’s infrastructure push, data from the National Bureau of Statistics (NBS) showed Wednesday. (See: MNI BRIEF: China May Sales, Output Improve As Covid Eased)

“The economy is expected to achieve reasonable growth in Q2, if the epidemic can be effectively controlled and pro-growth measures take effect,” the NBS spokesperson said at the data release, though also warning of "difficulties and challenges" ahead in the face of grimmer external environment.

But the uncertainty of whether easier Covid curbs will remain in place has led to instability in expectations, making it important to pursue more targeted and flexible anti-epidemic measures, wrote Wang Jingwen, senior analyst of China Minsheng Bank Research Institute in a WeChat blog post.

Wang added that the economic policy uncertainty index in May, moderated to 780.6 from April’s 843.9, but was still significantly higher than February’s 406.2.

RESUMED PRODUCTION

The unexpected increase in industrial output to a 0.7% gain y/y, reversing April’s 2.9% drop, was mainly driven by the pickup in the manufacturing sector as the resumption of work and production accelerated following eased Covid restrictions in May and exports regained momentum, said Wang, (See: MNI: China FX Policy Must Watch Sharply Weaker JPY On Trade).

Automobile manufacturing improved most significantly as the fall in output narrowed to 7.0% y/y from April’s trough of 31.8%, Wang added, (See: MNI: China May Exports Likely Boosted As Covid Lockdown Eased).

STILL DIM CONSUMPTION

However, retail sales remained the hardest-hit part of the economy, declining 6.7% y/y in May after contracting 11.1% in April. Sales of food, medicine and petroleum products maintained growth with higher prices, but spending on clothing, cosmetics, jewelry, home appliances and cars all fell by more than 10% y/y, wrote Wen Bin, chief researcher of China Minsheng Bank in a research note. (See: MNI: China Price Data Assures On Monetary Policy In 2H)

Meanwhile, service consumption was still greatly restricted as mega city Beijing halted dining at restaurants throughout the month. Catering revenue fell 21.1% y/y in May, narrowing slightly by 1.6 percentage points from April.

The so-called “retaliatory” consumption boom usually following the ease of Covid curbs seen in the past two years, is not happening into the third year of fighting against Covid-19. Damaged income expectations and rising willingness to save paint a dim picture for spending, according to Wang.

As well, the youth unemployment rate further rose to a record 18.4% in May, though the surveyed jobless rate fell by 0.2 percentage point to 5.9%, according to the NBS.

WEAK DEMAND

Infrastructure investment remained the main growth engine of the economy, quickening by 0.2 percentage point to a 6.7% y/y gain in the first five months, but the real estate sector is still in the doldrums with property investment falling 4.0% to hit the lowest level since March 2020, sliding further from the previous 2.7% fall.

Despite looser regulations and lower mortgage rates, home sales in square meters dip further by falling 23.6% y/y, compared with the previous 20.9% decline.

Residents are unwilling to increase leverage due to uncertainties in home price floor, their ability of keeping up monthly loan repayment and delivery risks by developers, Wang pointed out.