China Industrial Output Rebounds While Consumers Still Wary

China's economy showed a mixed recovery in May, with industrial production unexpectedly increasing while the property market continued to slump and consumer spending declined.

Data from the National Bureau of Statistics showed that industrial output rebounded from a drop in April. In a survey of economists, the median estimate was for a contraction.

The retail sales decline was less than the projected decline and better than the April plunge. In the first five months of the year, fixed-asset investment increased. The youth unemployment rate rose to a record high of 18.4%, despite the fact that the unemployment rate fell to 5.9%.

The Covid restrictions in Shanghai were loosened during the month to allow factories to resume production. Consumer activity was hampered by regular virus testing and other strict controls.

Robin Xing, Morgan Stanley's Chief China Economist, said that the recovery was just starting. We have seen the worst and the best of the recovery, but it is still incomplete and bumpy.

The Chinese stock market performed well on Wednesday. The benchmark CSI 300 Index rose as much as 1.1% in early trading, but fell back as the day wore on. The yield on the 10-year government bonds was little changed, while the Chinese currency strengthened.

The recovery in industrial output was helped by a rebound in the car sector as auto production centers reopened, with car output rising to 1.99 million vehicles, up from 1.28 million in April. Coal output jumped as electricity output fell.

A spokesman for the National Bureau of Statistics said that the national economy showed a good recovery in May. Production and demand gradually recovered, employment and prices were stable, and major indicators improved marginally.

Production swung to a modest expansion, buoyed by partial reopening in Shanghai, policy stimulus, and improved nationwide transportation links. Declines in retail sales narrowed. 

Even so, the economy is still operating well below pre-pandemic levels and unemployment is high -- with the youth rate hitting a record. We expect policy makers to continue to nurse the recovery with additional support.

Chang Shu and Eric Zhu

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The outlook for the economy's recovery is uncertain due to the ongoing outbreak in Beijing and Shanghai. The government's full-year target of 5.5% is out of reach due to last month's subdued activity and a weak recovery in June.

Home sales and investment fell in May from a year earlier. The services economy continued to suffer, with restaurant and Catering revenue dropping 21.1%, although that was an improvement from the 22.7% decline in April.

Beijing has mostly targeted businesses with little relief for consumers. A package of policies was rolled out last month.

The People's Bank of China did not cut the policy interest rate on Wednesday in order to avoid further policy divergence from the US that could cause more pressure on the yuan. The rate on the one-year medium-term lending facility was not changed.

With assistance by John, Lin, Yujing, and Shikhar.