(June 17): China’s housing slump deepened in May and triggered new calls for the government to pump cash and credit into the economy, while industrial output — which has kept growth on track — fell short of forecasts. 

Among a slew of data published on Monday, analysts latched onto the bad news from the property market, which has been the biggest drag on China’s economic growth. Declines in real estate investment and home prices both gathered pace last month.

Industrial production rose 5.6% from a year earlier, the National Bureau of Statistics said, slowing from April and missing the median forecast in a Bloomberg survey. Retail sales offered some encouragement, picking up more than expected, but Chinese shoppers remained far from recovering their pre-pandemic mojo. 

The numbers add up to a still-weak recovery, most economists said — likely requiring more action from Beijing to bolster consumer demand and tackle imbalances, if this year’s 5% growth target is to be met. That could take the form of stepped-up government spending and heightened efforts by the central bank to put a floor under housing markets and get credit flowing.

“The most disappointing in May’s data is probably that property sales barely saw any improvements even after so many supportive measures,” said Jacqueline Rong, the chief China economist of BNP Paribas SA. She said China’s authorities need to find ways to lower the rates on existing mortgages, closing the gap with the cost of new ones. 

The People’s Bank of China on Monday kept a key interest rate unchanged for the 10th straight month. Economists say the bank’s room to cut rates is constrained by the need to prop up the yuan, which faces downward pressure as the US Federal Reserve reinforces its high-for-longer message. 

Chinese stocks declined, with the onshore benchmark CSI 300 Index closing 0.2% lower. A gauge of Chinese developers’ shares fell 3.2% as of 3.08pm local time.

Overall fixed-asset investment rose 4% in January-May, down from 4.2% in the first four months — even though there’s been a pickup in government bond issuance to fund infrastructure spending. 

China’s growth remains “highly uneven, with exports and new energy-related capital expenditure as the drivers while consumption and property as the drags”, according to economists including Larry Hu at Macquarie Capital Ltd. Still, the slowdown isn’t severe enough to threaten the growth target, and while policymakers may take some limited action, “the urgency for a major stimulus is low”, they wrote.

The acceleration in retail sales was the first since November. At 3.7%, the pace remains less than half of the 8% or so that was typical before the Covid-19 pandemic, even though social and economic life has largely returned to normal. 

And even those gains may not last, according to Michelle Lam, an economist for greater China at Societe Generale SA.  “It remains to be seen if the better momentum in retail sales is sustainable,” she said. 

Since households have been reluctant to spend, China has turned to export-led growth instead. A factory boom helped offset the housing slump and kept economic growth on track. But that strategy faces growing uncertainties as major partners erect new trade barriers that threaten the export engine. Last week, the European Union (EU) followed the US by imposing hefty tariffs on Chinese electric cars.

Some analysts aren’t too concerned about the effects. China’s electric vehicle shipments to the EU account for just 0.4% of the country’s total exports, and the much higher selling price in Europe compared with at home means automakers will be able to absorb the charges, according to BNP’s Rong. She expects the tariffs to reduce China’s export growth by just 0.1 percentage point this year.

Seeking to shore up demand at home, China rolled out a programme in April that offers incentives for businesses and households to upgrade old machinery. Part of the plan involves government subsidies for buyers of new cars.

Monday’s data suggests the impact has been limited. Retail sales of automobiles fell 4.4% from a year earlier in May, only a slight improvement from the previous month.

Late last month, China also unveiled a broad rescue package to prop up housing sales as a credit crisis was engulfing some of the country’s biggest real estate developers. It relaxed mortgage rules and encouraged local governments to buy unsold homes. Many investors and analysts have cautioned that the financial incentives aren’t big enough, and trial programmes in several cities have shown that progress can be slow.

Subdued demand at home and the deteriorating foreign-trade environment are weighing on business confidence, discouraging companies from investing and driving some to move production overseas. Credit growth has been lacklustre, and the M1 money supply gauge contracted in May at the fastest rate in data going back to 1996.

In a survey of more than 400 top executives conducted by UBS Group AG over roughly a month through mid-May, firms reported weaker prospects for orders, revenue and margins compared to the same period of 2023. There was a drop in the share of respondents who plan to increase capital expenditure in the second half of this year.

“We still need to see new stimulus coming in,” said Helen Qiao, the chief Greater China economist of Bank of America Global Research, in a Bloomberg TV interview. “Otherwise, the growth momentum could very much weaken.” 

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