Beijing is under increased pressure to maintain development after China’s industrial production in May fell short of forecasts and the property sector’s slump did not appear to be abating despite policy support.

Aside from retail sales that exceeded expectations because of a boost from the holidays, Monday’s rush of statistics was mostly negative, highlighting the world’s second-largest economy’s rocky recovery.

According to National Bureau of Statistics (NBS) figures, industrial production increased 5.6% in May compared with the same month last year. This was lower than the 6.7% growth rate recorded in April and the 6.0% increase predicted by a Reuters poll of analysts.

On the other hand, retail sales, a measure of consumption, increased 3.7% year over year in May, up from a 2.3% increase in April and the fastest gain since February.

Because there was a five-day public holiday earlier in the month, analysts had projected a 3.0% expansion.

“May activity data and our high-frequency trackers for the first half of June suggest significant cross-sector divergences remain in the economy – strong exports and manufacturing activity, relatively stable consumption, and still-depressed property activity,” analysts at Goldman Sachs said in a note.

In contrast to predictions of a 4.2% increase, fixed asset investment increased 4.0% in the first five months of 2024 compared to the same time the previous year. It increased by 4.2% between January and April.

The strong rise of 9.6% in manufacturing investment in the first five months of this year was supported by China’s emphasis this year on “quality growth” through innovation and technical advancements.

However, analysts have cautioned that Chinese solar and electric car manufacturers may face more difficulties as a result of growing trade tensions with the West over China’s alleged overcapacity.

On Friday, the Nasdaq just managed to close at a record high for the fifth time in as many days, thanks to increases in tech-related sectors.

Investment in the private sector increased by 0.1% from January to May, compared with 0.3% growth in the previous four months, suggesting that private enterprises’ confidence is still low. In contrast, over the first five months, investment in the state sector increased by 7.1%.

Following the mixed statistics, Asian share markets were generally worse, with the Chinese blue chip CSI300 index down by 0.2%.

The economy was supported by exports, as seen by the notable increases in steel and aluminium production in May.

“Exports drove industrial growth and manufacturing investment significantly, but real estate weakness still hit household consumption and investment,” said ZhaoPeng Xing, senior China strategist at ANZ.

China’s deflationary pressure, massive local government debt, and collapsed property market continue to be major obstacles to economic growth. The most recent data indicates unequal growth, which supports the need for more support from the fiscal and monetary policies.

China’s central bank maintained a key policy rate constant on Monday as anticipated, with banks dealing with shrinking interest margins and a declining yuan continuing to be major obstacles to Beijing’s ability to loosen monetary policy.

Zhou Hao, chief economist at Guotai Junan International, stated, “We still see the likelihood of a cut to the Loan Prime Rate (LPR) this month, particularly on the 5-year tenor, as this will help banks to retain households’ mortgage loans,”

However, Citi Yu Xiangrong’s senior China economist anticipates an LPR decrease on June 20 but a total policy rate reduction of 20 basis points in the second half of this year.

China’s economy expanded by 5.3% in the first quarter, more quickly than anticipated. However, many argue that the government’s 5% annual growth objective is overly aggressive given the country’s still-fragile real estate market.

After declining by 9.8% from January to April, property investment declined by 10.1% year over year in January to May.

According to Reuters estimates based on NBS data, new house prices fell 0.7% in May from April, which was the 11th consecutive month-over-month reduction and the largest decline since October 2014.

In an effort to boost sales of unsold housing stock, the central bank last month introduced a relending initiative for affordable housing.

During a media conference on Monday, NBS spokesman Liu Aihua stated that policy measures would take time to take effect because the property market is now undergoing adjustment.

A regulatory crackdown, coupled with pressures from the demographic shift and the broader economy, have all hurt the property industry, which before the slump accounted for around 25% of economic production. To assist homeowners, the government has implemented a number of initiatives, including loosening mortgage regulations.

But since confidence in the face of a protracted crisis in the housing industry remains low, weak demand at home has put a lid on consumer prices. While certain important money indicators reached all-time lows in May, new bank lending increased far less than anticipated.

Overall, the job market remained stable. 5.0% was the unemployment rate in May according to a national poll, which was also the same in April.

Beijing has promised to boost domestic demand, increase employment connected to large projects, and provide fiscal stimulus in order to support development.

(Adapted from Business-Standard.com)

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