China’s economy seems to be pretty much back on track after signs of resurgence in multiple industries in May. Moving on to our next country, the country’s “eat, drink, and play” tagline is taking off. There has been a dramatic increase in catering, tobacco and alcohol sales, and sports and recreation. On the flip side, manufacturing has surprised on the upside, particularly high-tech sectors. Though these are all positive indicators, the situation is not without challenges, including a drop off in foreign investment and mixed conditions in the housing market.
Year-on-year, China’s catering sector expanded at a pace of 5.9% in May. On the flip side, the tobacco and alcohol industries prospered with a dramatic boom of 11.2%. Recreation and sports activities jumped 28.3%, showing a strong return of consumer demand for leisure, socializing and community-based activities following pandemic lockdowns. This latest increase in the service industry is a sign that we are moving to a more consumption based economy.
Resilient Manufacturing and High-Tech Growth
China’s manufacturing growth remained robust at 6.2% year-over-year (YoY), demonstrating the sector’s ability to withstand global economic pressures. With industrial production growth ytd at 6.3%, signs point to factories still humming and producing regardless of whatever happens outside the factory walls.
The hi-tech sector especially stood out in May, registering a robust growth rate of 8.6% YoY. This strong performance underscores the rising prominence of technology-driven industries in China’s economic matrix. Specific subsectors fared well: rail, ships, and planes grew by 14.6%, autos by 11.6%, electrical machinery by 11.0%, and computers and communication equipment by 10.2%. These numbers highlight a continuing uneven recovery in multiple segments of the manufacturing sector.
Consumption Trends and Housing Market Fluctuations
Moreover, July retail sales growth came in as a consistent 5.0% YoY year-to-date, pointing to an overall recovery of confidence among China’s consumers. The government’s generous trade-in policy has played a big role in the spike in household consumption. In reality, the household appliances sector experienced a totally staggering increase, at +53.0%! Another big gainer was the communications appliances industry at 33.0%.
This is where the housing market gets complicated. Only three of the 70 largest cities still had stable or rising used home prices in May. Notably, new home prices are down 0.2% month-on-month (MoM) and used home prices were down 0.5% MoM. Together, these trends suggest that the private sector is doing quite well. At the same time, the real estate market is reeling under burdens of increasing tariffs and economic uncertainty.
Investment Climate and Foreign Trade Dynamics
China’s fixed-asset investment (FAI) growth was at 3.7% YoY year-to-date, a testament to the continued push for investments across sectors. Despite all of this, foreign investment in China has cratered by 13.4% year-over-year through August. It’s this significant drop that should raise eyebrows and demand answers about the long-term sustainability of this recovery.
Despite these challenges, China’s exports grew by 6.0% YoY year-to-date, slightly outpacing last year’s growth rate of 5.9%. Chinese goods are at the same time showing that they are competitive in international markets. That resilience in export performance heartens as the country contends with increasing domestic economic pressures.
China today faces unprecedented and complicated economic headwinds. Combined with continued deflation in the GDP deflator going into the second quarter, this would be seven straight quarters of GDP deflator led deflationary pressure. This disconnect creates no shortage of problems for policymakers as they work to both keep the economy stable and growing.