Pew Survey shows that much of the world doesn’t see China as a warm and fuzzy country

 

ANOTHER RAFT OF LARGELY BAD MONTHLY ECONOMIC DATA FROM CHINA:

The May numbers on inflation, the housing market, exports and imports, and retail sales are now all in and, save for the latter, none are good.  Once again, when it comes to disappointing economic data, China continues to be the gift that keeps on giving.

Last month saw a continued fall in consumer and factory gate prices.  The consumer price index (CPI) dipped 0.2% on a monthly basis after registering a slight uptick of 0.1% in April.  Compared to a year earlier, the CPI fell 0.1% in May, matching a similar 0.1% decline compared to a year earlier in April.  Factory gate prices, as measured by the Producer Price Index (PPI), underwent a sharper drop, falling 3.3% in May from a year earlier.  This was worse than the 2.7% drop from a year earlier in April and was the biggest decline in the PPI in 22 months.  May marked the 32^nd consecutive month in which China’s PPI has been in negative territory.  The latest contraction in factory gate prices came on the heels of the steep tariffs the Trump Administration imposed on Chinese goods in April.      

The news regarding the core rate of inflation, which excludes highly volatile food and fuel prices, was a little more encouraging.  This price gauge rose slightly, inching up by 0.6% year-on-year, which was a little higher than the 0.5% rise in April.  But Huang Zichun, China economist at Capital Economics, sounded a cautionary note, observing that the upward trend in core prices seems “fragile,” further noting, “we still think persistent overcapacity will keep China in deflation this year and next.”

The one bit of good news for China in the May economic data was retail sales.  These rose by 6.4% in May, exceeding the 5.1% increase in April and coming in above the 5% growth rate predicted by analysts.  The May jump in retail sales was the quickest increase since December 2023.  But while this is certainly something to cheer about, one should not get too carried away.  To start with, as CNBC Asia economics correspondent Anniek Bao notes in her usual excellent reporting, the boost in consumption may well be blip on the screen, reflecting a number of special one-off factors.  National Bureau of Statistics spokesman, Fu Linghui, she notes, chalks up the May spurt in retail purchases to the ongoing government consumer goods trade-in program, a jump in online shopping ahead of the “618” e-commerce event, and rise in foreign tourists entering China after it extended its visa-free entry to more countries.  Senior economist at Natixis, Xu Jianwei, told Bao via email, “Absent further demand-side stimulus, we expect that the consumption recovery will be short-lived.” 

This lack of optimism stems from ongoing weak Chinese consumer sentiment.  That weakness is underscored in the latestquarterly surveys of Chinese households conducted by the People’s Bank of China (PBoC).  In the PBoC survey for the final quarter of 2024, which was released in March, 61.4% of respondents said they preferred to save, rather than spend money (or invest it).  That figure is only slightly below the record high of 64% of households who expressed that preference during the third quarter of last year.  Of those who said they would spend more, education, health care, and tourism topped other consumption categories.  Physical goods were conspicuously absent in this list of spending priorities.  Zhang Zhiwei, President and Chief Economist at Pinpoint Asset Management thus echoes Xu Jianwei’s pessimism regarding the May jump in retail sales, regarding it as a short-lived boost, while pointing to falling property prices as constraining consumer confidence.  

Speaking of housing, the May data on home sales makes it clear that China’s real estate slump is far from over.  The latest bad numbers are summarized by Reuters in a June 15^th review of the current trends in home sales.  In May, new housing prices fell 0.2% month-on-month, after failing to rise in April.  May housing prices were 3.5% below what they had been at the same time last year; the corresponding figure for April was 4%.  The May data is notable for the renewed weakness of the housing market in major cities, where prices dropped 0.2%, reversing five straight monthly 0.1% gains.  Housing prices in smaller lower Tier 3 and 4 metropolises extended their continuous post-May 2023 downward streak, falling by 0.3%, more than the 0.2% drop in April.  Rounding out these grim figures is official data released on June 9^th showing a 10.7% drop in property investment year-on-year and 2.9% fall in sales by floor area from January-May.

 

Nor can beleaguered Chinese homeowners expect relief from the residential real estate downturn anytime soon.  Housing prices are projected to fall by nearly 5% during 2025 and then stagnate through 2026.

All through China’s sluggish post-Covid economic recovery, exports have stood out as one bright spot.  Yet now even that pillar of strength is showing signs of softening.  Total Chinese exports increased 4.8% year-on-year in value terms during May, missing the 5% growth level analysts had predicted in a Reuters’ poll of analysts.  Exports had been growing at a 12.4% clip year-on-year, while rising 8.1% in March and April, respectively.  To be sure, the surge in exports prior to April was somewhat driven by American importers rushing to lock-in goods orders before Trump’s anticipated tariffs on China kicked in.  However, the decline in the May numbers took place despite the lowering of US tariffs on China that had taken effect in early April.

Speaking of those US tariffs, their negative impact can be seen in customs data showing that Chinese exports to America plunged 34.5% year-on-year in May in value terms.  That was the steepest fall since the outbreak of the Covid-19 pandemic in February 2020, which completely disrupted global commerce.  The May data shows that Chinese efforts to reroute exports to the European Unio (EU) andSoutheast Asia has not completely offset the diminished importance of the US market.  As my update on Chinese-EU trade relations at the end of this post makes clear, that strategy is, at best, a short-term palliative against high American trade barriers on China.              

Even more worrisome for China is the steep drop in imports during May, as this data points to underlying weaknesses in its economy.  As the above graph shows, imports shrank 3.4% year-on-year last month.  That drop was much higher than April’s 0.2% decline and beat the 0.9% fall predicted in the Reuters’ poll of analysts.  The sharp contraction in imports helped swell China’s May trade surplus to $103.22 billion, despite the slowing growth of exports.  It also reflects ongoing anemic domestic consumption.  Other official data released on June 9^th indicating that China’s imports of crude oil, coal, and iron ore all were down in May, underlines weak consumer demand, along with subdued industrial activity in the face of that demand and slowing exports.  

Finally, the May economic data indicate that China’s manufacturing juggernaut may be slowing down a bit.  Industrial output rose5.8% year-on-year last month, down from the 6.1% increase in April.  The May growth rate fell short of the 5.9% increase in industrial output predicted in a Reuters’ poll of analysts and was the slowest rise since November of last year.  At the same time, fixed asset investmentgrew 3.7% in May compared to year earlier.  The May number came in below the 3.9% growth rate predicted in a Reuters’ poll of analysts, while falling short of the 4% rise in fixed asset investment during the first four months of 2025. 

The latest May data drop on China’s economy clearly shows that it has yet to emerge from its post-Covid lethargic growth.  The housing sector remains mired in the slump that followed the Government’s efforts in 2020-2021 to deflate the real estate bubble.  The price data, particularly the continued fall in the PPI, underscores the ongoing threat of deflation.  Businesses are slashing prices, with Starbucks, which has a huge presence in China, announcing earlier this month that it would lower prices of iced drinks by an average of 5 Yuan.  A fierce price war has broken out amongleading EV producers, including BYD, Geeley, and Chery, in the face of decelerating growth in customer demand.  Government authorities are now warning that such price competition undermines the long-term health of the EV industry, which has become a poster-child for Chinese new-found prowess in advanced manufacturing activity.  This behavior by companies reflects continued shaky consumer demand that has, in large measure, been buoyed up by the government’s consumer goods trade-in program.  However, that scheme to boost consumption may be limited or phasedout entirely, due to the inability of local government to fund it.  Chongqing has been forced to suspend the granting of subsidies, while Jiangsu and Guandong provinces placed restrictions on these consumer handouts.    

China’s struggle to attain more robust economic growth continues. 

 UPDATE ON CHINESE-EU TRADE RELATIONS

I noted earlier in this blog post that some of the sharp fall in China’s exports to the US brought on by Trump’s tariffs has been offset by increased deliveries of goods to the EU.  But as the New York Times reported in a June 17^th article, this Chinese effort to reroute its export trade away from the US is “unleashing a new export shock on the world.”  That shock, in turn, is producing the inevitable backlash.  That is especially evident in the case of EU.  Thus, in what is amounts to a highly unusual step, EU President Ursula von der Leyen refused to hold an economicmeeting with Chinese leaders prior to the EU-China summit, citing lack of progress of trade issues.  These include the slow renewal of rare earth exports and ongoing spats in a variety of other areas.  The German machinery industry, for example, is now urging the EU to impose trade barriers to protect it, arguing that “China is not playing fair, and politicians must respond this.”  Such calls are a notable turnaround, as the industry benefited heavily from Chin’s rise as a manufacturing power during the 1990s and early 2000’s, which led it to import large quantities of capital goods, including from German machinery makers.  These firms were then among the staunchest backers of stronger EU-China economic ties.