China's economy shows mixed recovery in May with consumers under strain

The recovery of China's industrial output was helped by a rebound in the car sector as auto production centers like Jilin and Shanghai reopened

China’s economy had a mixed recovery in May as Covid restrictions gradually eased, with industrial production unexpectedly increasing while consumer spending and a property market continuing to contract.
 

Industrial output rose 0.7% from a year ago, the National Bureau of Statistics said Wednesday, while the almost 7% contraction in retail sales was better than the plunge in the previous month. Fixed-asset investment grew 6.2% in the first five months of the year and the surveyed jobless rate fell.

Some Covid restrictions in Shanghai were eased during the month, allowing factories to gradually resume production and logistics bottlenecks to ease. However, regular virus testing and other stringent controls continued to hinder consumer activity across the country. 

The course of the recovery remains uncertain as Beijing continues to rely on lockdowns and other restrictions to contain large-scale outbreaks of the virus. Last month’s still subdued activity and signs of a weak recovery in June will weigh on growth and put the government’s full-year target of around 5.5% further out of reach. 

“Growth has bottomed, the recovery just started,” Robin Xing, Morgan Stanley’s chief China economist, said in an interview on Bloomberg Television. “It’s still a very incomplete and bumpy recovery, but we have seen the worst.”

Chinese stocks were the best performers in Asia on Wednesday, with the benchmark CSI 300 Index climbing 1.8% as of the mid-day break. The onshore yuan strengthened as much as 0.4%. Futures contracts on China’s 10-year government bonds fell as much as 0.1% to 100.21, the lowest since May 20, amid improved risk sentiment.

The recovery in industrial output was helped by a rebound in the car sector as auto production centers like Jilin and Shanghai reopened, resulting in output of 1.99 million vehicles, up from 1.28 million in April. Demand remains weak though, with car sales continuing to fall by 16% in May, taking the decline for the year to almost 10%. 

Fu Linghui, a spokesman for the NBS, said the economy is expected to improve further in June and achieve “reasonable” growth in the second quarter if Covid outbreaks are controlled. The government’s Covid relief package is likely to have a bigger impact in June, he said. 

Key Highlights of the Data

• Industrial output rose 0.7% y/y in May; median est. was -0.9%
• Retail sales fell 6.7% y/y in May; median est. was -7.1%
• Fixed-asset investment in Jan-May rose 6.2% y/y; median est. was 6%
• Jobless rate fell to 5.9%; median est. was 6.1%
• Electricity output fell 3.3% in May y/y; coal output jumped 10.3%
   

Chinese aluminum output hit an all-time high and steel production rose to its strongest in a year, as industrial activity rebounded from the worst of the virus restrictions. Steel producers are gearing up for increased infrastructure spending, while aluminum companies have seen a surge in export demand. 

Even so, the return to production has been slow, with many businesses not yet fully operational and real-time data on truck flows in Shanghai and for the country showing activity is not even back at the level before the lockdown.

The property sector continued to struggle, with home sales down 41.7% and investment falling 7.8% in May from a year earlier. The services economy also remained in a deep slump, with restaurant and catering revenue dropping 21.1%, although that was an improvement from the 22.7% decline in April.

What Bloomberg’s Economists Say...

The data “confirmed the economy has made it through the worst period of the omicron setback.”

However, “the economy is still operating well below pre-pandemic levels and unemployment is high -- with the youth rate hitting a record. We expect policy makers to continue to nurse the recovery with additional support.”

-- Chang Shu, chief Asia economist

Instead of spending, consumers are rapidly adding to their savings, which grew by 7.86 trillion yuan ($1.2 trillion) in the first five months of the year, the most for the period since data began in 2005, according to figures released by the People’s Bank of China.

So far, Beijing’s stimulus has largely targeted businesses, with limited relief for consumers facing job losses and sliding incomes. The government last month rolled out a package of policies, including more tax breaks and loans for infrastructure projects. 

The People’s Bank of China on Wednesday abstained from cutting a key policy interest rate, avoiding further policy divergence from the US that could add pressure on the yuan. The rate on the one-year medium-term lending facility was kept unchanged at 2.85%, in line with most forecasts. 

“We anticipate a recovery in the second half of this year as policy stimulus takes effect,” wrote Tommy Wu, lead China economist at Oxford Economics. However, “it will be difficult for household consumption to recover strongly. Consumer sentiment is unlikely to turn sanguine as ‘dynamic zero Covid’ strategy remains in place despite the fine-tuning that we have seen so far.”