China's retail sales experience first drop in 3 years; industry advances

China's economy showed a growing imbalance in May, with retail sales falling for the first time in more than three years and investment falling, while industrial production gathered pace.

Official data released on Tuesday highlighted a two-speed growth pattern in the world's second-largest economy, with factories buoyed by resilient exports but domestic demand weakening amid a multi-year recession in the housing market.

Retail sales, an important indicator of consumption, fell 0.6% in May compared to the previous year, according to data from the National Statistics Office, reversing the 0.2% increase recorded in April and against stability estimates in a Reuters survey. It was the first monthly drop since December 2022.

The fragility was evident in the automotive sector. The slowdown in domestic auto sales extended into an eighth consecutive month in May, highlighting weakening demand in the world's largest auto market, where pressure is likely to persist for the rest of the year.

Traveler spending during the five-day Labor Day holiday in May was subdued, and the impact of the government's consumer goods exchange program is waning. A high base from May last year also contributed to the decline.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said weak retail sales data put pressure on the government to consider measures to stabilize consumption. "I still expect there to be a 'fine tuning' of monetary policy in July, following the release of second quarter GDP data."

In contrast, industrial production grew 4.5% in May compared to the previous year, accelerating from the 4.1% rate in April and exceeding expectations for a 4.3% increase.

A surge in global investment in AI and demand for related technologies helped the world's largest manufacturer offset the hit to exports that many expected from the war with Iran. China's high-tech industrial production grew 15.1% in May.

Consumption of services grew 5.4% in the period from January to May, much better than sales of goods and becoming a growing driver of household consumption, but it also slowed down from the 5.6% recorded in the first four months.

Investment data was also much weaker than expected. Fixed asset investment fell 4.1% in the first five months of 2026, following a 1.6% decline between January and April. Economists expected a 2% drop.

Statistics bureau spokesman Fu Linghui said the drop was partly due to high temperatures and heavy rainfall in some regions, as well as the transition from old to new drivers of growth.

China still has ample scope for investment in the future, with new urbanization, rural revitalization, the development of "new quality productive forces" and improvements in public services all needing support, Fu added.

Real estate investment extended its decline in the first five months, falling 16.2% compared to the same period last year, after a 13.7% drop between January and April. Home sales and new construction also saw steeper declines.

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Source: CNN