China May Data: Factory Output Beats, Spending Slumps

China's May economic data delivered a stark split that is becoming harder to paper over. Industrial output rose 4.5% from a year ago, beating the 4.2% consensus and accelerating from April's 4.1% gain, according to the National Bureau of Statistics. The driver: a global surge in AI-related investment that pushed export growth to 19.4% year-on-year. That external momentum has not spilled over into domestic spending.

Retail sales fell 0.6% in May, the first annual decline since December 2022. The print reversed April's modest 0.2% increase and came in well below expectations for a flat reading. The government's consumer goods trade-in programme, which had given a small lift earlier, appears to have lost its force. A five-day Labour Day holiday did not prevent the miss.

Fixed asset investment contracted 4.1% in the first five months of the year, more than double the 2.0% decline consensus had pencilled in. Property investment extended its slide, dropping 16.2% year-to-date after a 13.7% decline through April. New home prices continued to fall, and the pace of monthly declines edged slightly faster. Weak household loan data released last week pointed to continued consumer caution on borrowing for homes amid sluggish income growth.

The price picture added to the imbalance. Factory-gate inflation climbed to its highest since July 2022, while consumer inflation remained stagnant. The divergence points to demand failing to keep pace with supply-side expansion, analysts said. Downstream companies face margin compression.

Unemployment ticked down to 5.1% from 5.2%, a rare positive. Yet analysts note that anxiety around AI-driven job displacement is weighing on household confidence, which may be suppressing consumption independently of the property downturn.

The Transmission Path: Commodities and Currencies