China’s factory output disappoints, property sector stuck in doldrums

China’s May industrial output lagged expectations and a slowdown in the property sector showed no signs of easing despite policy support, adding pressure on Beijing to shore up growth.

Apart from retail sales that beat forecasts due to a holiday boost, the flurry of data on Monday was largely downbeat, underscoring a bumpy recovery for the world’s second-largest economy.

May industrial output grew 5.6 per cent from a year earlier, National Bureau of Statistics (NBS) data showed, slowing from the 6.7% pace in April and below expectations for a 6.0 per cent increase in a Reuters poll of analysts.

However, retail sales, a gauge of consumption, in May rose 3.7 per cent on year, accelerating from a 2.3 per cent rise in April and marking the quickest growth since February. Analysts had expected a 3.0 per cent expansion due to a five-day public holiday earlier in the month.

“May activity data and our high-frequency trackers for the first half of June suggest significant cross-sector divergences remain in the economy - strong exports and manufacturing activity, relatively stable consumption, and still-depressed property activity,” Goldman Sachs analysts said in a note.

Fixed asset investment rose 4.0 per cent in the first five months of 2024 from the same period a year earlier, versus expectations for a 4.2 per cent rise. It grew 4.2 per cent in the January to April period.

Manufacturing investment in the first five months showed robust growth of 9.6 per cent, underpinned by China’s emphasis for “quality growth” through technological breakthroughs and innovation this year.

But economists have warned that rising trade tensions with the West over China’s so-called over-capacity may impose more challenges to Chinese solar and electric vehicle producers.

Private sector investment grew 0.1 per cent in January-May, down from 0.3 per cent in the first four months, pointing to still weak confidence among private businesses. By comparison, investment in the state sector jumped 7.1 per cent in the first five months.

Asian share markets were mostly softer following the mixed data with the Chinese blue chip CSI300 index slipping 0.2%.

Exports helped bolster the economy, with steel and aluminium output posting sharp jumps in May.

“Exports drove industrial growth and manufacturing investment significantly, but real estate weakness still hit household consumption and investment,” said ZhaoPeng Xing, senior China strategist at ANZ.

China’s property market slump, high local government debt and deflationary pressure remain heavy drags on economic activity. The latest figures point to an uneven growth that reinforces calls for more fiscal and monetary policy support.

With banks facing narrowing interest margins and a weakening currency remaining key constraints limiting Beijing’s scope to ease monetary policy, China’s central bank left a key policy rate unchanged as expected on Monday.

“We still see the likelihood of a cut to the Loan Prime Rate (LPR) this month, particularly on the 5-year tenor, as this will help banks to retain households’ mortgage loans,” said Zhou Hao, chief economist at Guotai Junan International.

But chief China economist at Citi Yu Xiangrong expects a total 20-basis-point policy rate reduction in the second half of this year, but no LPR cut on June 20.

China’s economy grew a faster-than-expected 5.3 per cent in the first quarter, but analysts say the government’s annual growth target of around 5 per cent is ambitious as the property sector remains in the doldrums. Property investment fell 10.1 per cent year-on-year in January-May, deepening from a decline of 9.8 per cent in January-April.

New home prices slipped 0.7 per cent in May from April, marking the 11th straight month-on-month decline and steepest drop since October 2014, according to Reuters calculations based on NBS data.

The central bank last month announced a relending programme for affordable housing to accelerate sales of unsold housing stock.

NBS spokesperson Liu Aihua told a media briefing on Monday that the property market is undergoing adjustment and it will take some time for policy measures to kick in.

The property sector, which accounted for around a quarter of economic output before the downturn, has been hit by a regulatory crackdown as well as demographic and broad economic pressures. The government has launched a slew of measures to help homebuyers, such as easing mortgage rules.

But tepid demand at home has kept a lid on consumer prices as confidence remains low in the face of a protracted property sector crisis. New bank lending rebounded far less than expected in May and some key money gauges hit record lows.