China’s economy experienced a setback in May as both industrial output and retail sales growth fell short of expectations. This has raised concerns that the Chinese government will need to take additional measures to support the fragile post-pandemic recovery.
The strong economic rebound witnessed earlier this year has lost momentum in the second quarter, prompting the central bank of China to cut certain key interest rates. There are expectations of further rate cuts in the future.
According to the National Bureau of Statistics (NBS), industrial output grew by 3.5% in May compared to the previous year, which is slower than the 5.6% expansion seen in April. This figure also fell slightly below the analysts’ poll forecast of a 3.6% increase. The manufacturing sector is grappling with weak domestic and international demand, leading to this slowdown.
Retail sales, a crucial indicator of consumer confidence, increased by 12.7% in May. However, this figure fell short of the predicted growth rate of 13.6% and showed a decline compared to April’s 18.4% growth.
Zhiwei Zhang, the president of Pinpoint Asset Management, noted that the available data consistently signals a weakening economic momentum. Various factors, including factory surveys, trade activities, loan growth, and home sales, indicate signs of weakness in the world’s second-largest economy.
Notably, crude steel output continued to decline in May, both on a year-on-year and month-on-month basis, while daily coal output also dropped compared to April, as reported by the NBS.
Contrary to expectations of a robust recovery, considering the low performance of the previous year due to strict COVID lockdowns, the recent data portrays a softer economic outlook.
These figures further strengthen the case for implementing more stimulus measures in China due to deflationary risks, mounting local government debts, record levels of youth unemployment, and weakening global demand.
Bruce Pang, the chief economist at Jones Lang LaSalle, emphasized that introducing large-scale policy easing as a stimulus measure would be the initial step.
However, he also pointed out that it may take two to three years to bolster the decelerating economic recovery.
In response to the economic challenges, China’s central bank recently reduced the interest rate on its one-year medium-term lending facility, marking the first such easing in 10 months.
This move paves the way for further cuts in the benchmark loan prime rates (LPR) in the upcoming week. Consequently, the yuan experienced a six-month low, while China’s stock markets saw a rise, with the CSI 300 index gaining 0.6% and Hong Kong’s Hang Seng Index climbing 1.2%.
Market expectations are leaning towards more stimulus measures, including initiatives targeting the struggling property sector, which has historically been a significant driver of China’s economic growth.
Although Beijing policymakers have been cautious about implementing aggressive stimulus measures to avoid potential capital flight risks, analysts assert that further easing will be necessary.
To alleviate pressure on profit margins and encourage spending, major Chinese banks have recently reduced their deposit rates. Julian Evans-Pritchard, the head of China at Capital Economics, believes that while the central bank’s easing measures alone may not have a substantial impact, they do indicate growing concerns among officials about the health of China’s recovery.
Evans-Pritchard also mentioned that the second quarter is shaping up to be weaker than anticipated, necessitating additional policy support to prevent the economy from slipping back into a downturn.
During a press briefing, NBS spokesperson Fu Linghui stated that second quarter growth is expected to pick up due to the low base effect from the previous year.
However, he cautioned that the recovery still faces challenges, including a complex and challenging international environment, sluggish global economic recovery, and insufficient domestic demand.