China’s retail sector got a huge lift in May with an increase of 12.4 percent year-on-year, the fastest pace since last fall. Retail sales were up 6.4% over the same month last year, far surpassing the 5% rise predicted by analysts. This increase represents a dramatic step up from April’s 5.1% growth rate. This year’s extended Labor Day and Dragon Boat holidays were enough to drive strong consumer spending across the country.
These strong retail sales numbers underscore just how different this picture is when compared to the rest of the economy. Despite the good news on retail sales, downward pressure for the economy has come from other areas including industrial output and exports. As a result, China’s industrial output growth decelerated to a languid 5.8% year-on-year in May, down from 6.1% in April. China’s exports to the US are down over 34% from this time last year. This drop is the largest single-month drop since February 2020.
We asked Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, what was most surprising about the retail sales report. He stated,
“The rise of retail sales came as a surprise.” – Zhiwei Zhang, president and chief economist at Pinpoint asset management.
This spike in retail sales should be parsed out for what spurred it. The consumer goods trade-in program has radically changed the trade economy. Second, it encourages consumers to take initiatives to improve their purchases. Despite these positive developments, challenges remain. Falling property prices continue to pose a threat to consumer sentiment, as many households feel the effects of tightening financial conditions.
At the same time as retail boom, fixed-asset investment in China grew just 3.7% YoY as of May. All this development is happening even as property investment has taken a massive nose dive. It declined by 10.7% through the first five months of the year. The property sector’s ongoing challenges are symptoms of these continuing economic readjustments, which could weigh on future consumer confidence.
As JP Morgan analysts note, if China is serious about stimulating consumption then they need to be working to stimulate the consumption of services over goods. This change would help keep the momentum in consumer spending going strong. It further provides a protective buffer against otherwise persistent headwinds in the goods space.
The China urban survey-based unemployment rate improved marginally, slipping to 5.0% in May from 5.1% in April. Yet despite this considerable uptick in activity, deflation fears linger, especially after factories-gate prices dropped 3.3% from a year earlier. This trend into deflation would make monetary policy and the overall recovery from COVID-19 much more difficult.