China’s factories perk up, but weak consumption show slow economic recovery

China’s economy showed signs of recovery in May after slumping in the prior month as industrial production rose unexpectedly, but consumption was still weak and underlined the challenge for policymakers amid the persistent drag from strict COVID curbs.

The data, however, provides a path to revitalise growth in the world’s second-biggest economy after businesses and consumers were hit hard due to full or partial lockdowns in dozens of cities in March and April, including a protracted shutdown in commercial centre Shanghai.

Industrial output grew 0.7% in May from a year earlier, after falling 2.9% in April, data from the National Bureau of Statistics (NBS) showed on Wednesday. That compared with a 0.7% drop expected by analysts in a Reuters poll.

The uptick in the industrial sector was underpinned by the easing of COVID curbs and strong global demand. China’s exports grew at a double-digit pace in May, shattering expectations, as factories restarted and logistics snags eased.

The mining sector led the way with output up 7.0% in May from a year ago, while that in the manufacturing industry eked out a meagre 0.1% growth, mostly driven by the production of new energy vehicles which surged 108.3% year-on-year.

“Overall, our country’s economy overcame the adverse impact from COVID (in May)and was showing a recovery momentum”, Fu Linghui, a spokesman at NBS, told a press conference, adding that he expects the revival to improve further in June due to policy support.

“However, the international environment is still complex and severe, with greater uncertainties from outside. Our domestic recovery is still at its initial stage with the growth of key indicators at low levels. The foundations for recovery are yet to be consolidated.”

CONSUMPTION PRESSURE

That caution was underscored in consumption data, which remained weak as shoppers were confined to their homes in Shanghai and other cities. Retail sales slipped another 6.7% in May from a year earlier, on top of a 11.1% contraction the previous month.

They were slightly better than the forecast of a 7.1% fall due to the increased spending on basic goods such as grains, oils and food and beverages.

Industry data showed China sold 1.37 million passenger cars last month, down 17.3% from a year earlier, narrowing the decline of 35.7% in April.

Fixed asset investment, a key indicator tracked policymakers looking to prop up the economy, rose 6.2% in the first five months, compared with an expected 6.0% rise and a 6.8% gain in the first four months.

China’s property sales fell at a slower pace in May, separate official data showed on Wednesday, supported by a slew of easing policy steps to boost demand amid the tight COVID-19 curbs.

The government has been accelerating infrastructure spending to boost investment. China’s cabinet has also announced a package of 33 measures covering fiscal, financial, investment and industrial policies to revive its pandemic-ravaged economy.

The nationwide survey-based jobless rate fell to 5.9% in May from 6.1% in April, still above the government’s 2022 target of below 5.5%. In particular, the surveyed jobless rate in 31 major cities picked up to 6.9%, the highest on record.

Some economists expect employment to worsen before it gets better, with a record number of graduates entering the workforce in summer.

China has set an annual economic growth target of around 5.5% this year but many economists believe that is increasingly out of reach.

Chinese banks extended 1.89 trillion yuan ($280.62 billion)in new loans in May, nearly tripling April’s tally and beating expectations. But 38% of the new monthly loans were in the form of short-term bill financing, suggesting real credit demand still remains weak.

The central bank on Wednesday kept medium-term policy rate unchanged for a fifth straight month, matching market expectations.

FRESH LOCKDOWN FEARS LOOM

While the world’s biggest manufacturer reported better-than-expected export growth in May, the subdued external demand due to the Ukraine war and robust production recovery of Southeast Asian nations threaten the country’s trade outlook.

Fears of fresh lockdowns also loom large under China’s zero-COVID policy.

One week after the reopening of Shanghai, the local government ordered 15 of the city’s 16 districts to undertake mass testing to contain a jump in cases tied to a hair salon.

Authorities in Beijing warned on Tuesday that the city of 22 million was in a “race against time” to get to grips with its most serious outbreak since the pandemic began.

Any potential lockdown and supply chain disruption risks amid future COVID outbreaks may constrain the rebound of the economy as Beijing has shown no sign of easing its zero-COVID policy, analysts say.

($1 = 6.7350 Chinese yuan)

(Reporting by Kevin Yao, Ellen Zhang and Stella Qiu; Editing by Shri Navaratnam)

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