- Industrial activity improved, supported by a resilient external trade outlook.
- Domestic demand across consumption, investment, and credit remained weak.
- RMB2tn AI infrastructure plan is expected to serve as a key pillar for future FAI growth.
- Implication to market: No cut in 1Y LPR in 2026 reflecting a more measured policy stance.
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China’s resilient exports continue to cushion overall growth, but domestic demand remains the key drag. May data show broad-based softness across consumption, investment, and credit, pointing to a still uneven recovery.
Trade
External trade momentum remained robust. Exports grew from 14.1% yoy in April to 19.4% in May amid ceasefire in Middle East and stronger demand for AI-related electronics. Imports also jumped to 27.4% yoy, reflecting higher purchases of intermediate goods as manufacturers responded to firmer export orders. Exports to the US saw a particularly sharp increase, rising from 11.3% yoy in April to 35.4% in May, amid improved bilateral sentiment following Xi-Trumps summit.
Industrial production
Industrial activities stayed resilient, as war-related supply chain disruption eased. Industrial production growth improved from 4.1% yoy in April to 4.5% in May. While anti-involution measures have weighed on some oversupplied sectors, high-tech manufacturing remained a key growth driver, with integrated circuits and industrial robot production rising 22.9% yoy and 27.9% yoy, respectively.
Fixed asset investment (FAI)
Investment sentiment remained tepid. Decline in FAI widened from -1.6% yoy ytd in April to -4.1% in May. Private investment extended its decline to 7.1% yoy. Investment sentiment stayed weak across most sectors. Looking ahead, however, policy support may help stabilise the outlook. China is reportedly preparing a large-scale AI infrastructure investment programme worth around RMB2trn over five years, which is expected to become a key pillar supporting future FAI growth.
Real estate sector continued to weigh on growth. Property investment fell by 16.7% in the first five months, with developers continuing to prioritize project completion. Elevated inventories (33 months of residential turnover) weigh on prices and sales. Improvements were largely contained in Tier 1 cities.
Retail sales
Household sentiment stayed weak. Retail sales growth turned from 0.2% growth in April to contraction of 0.6% yoy in May, reflecting subdued income growth and uncertain employment conditions. Precautionary savings remained elevated, while weakening property prices continued to erode household wealth effects, suggesting consumption is likely to remain subdued in the near term.
Loan and deposit
Monetary indicators remained soft. Outstanding loan growth continued to weaken, reaching a two-decade low of 5.5% yoy in May. Medium- to long-term lending to both corporates and households contracted, suggesting continued early loan repayments and restrained financing demand. Although the M2–M1 spread narrowed to 3.1 ppts in May, sluggish credit data indicates that recent liquidity easing has yet to translate effectively into broader economic activity.
Inflation
Producer and consumer prices continue to diverge. PPI accelerated to 3.9% yoy in May, with higher commodity prices offering some support to upstream industrial profitability. However, rising input costs are likely to compress margins for downstream manufacturers and retailers. Meanwhile, consumer inflation remained subdued, with headline CPI increasing only 1.2% yoy and continuing to trail PPI significantly, highlighting still-soft domestic demand conditions.
Conclusion and implication on rates
Lingering energy price pressures reduce the likelihood of monetary policy easing. We therefore expect no cuts to the 1Y LPR over the next 18 months. Instead, policy support is likely to lean more on fiscal expansion to bolster growth. A resilient external sector, alongside improving trade relations with the US, could help stabilise overall growth momentum. Against this backdrop, policymakers appear comfortable maintaining a targeted easing approach rather than pursuing broad-based rate cuts.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
[email protected]
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