China: Industry Remains Strong, but Consumption Falls for the First Time Since 2022

An accelerating industry, a stalling domestic demand

Chinese industrial production increased by 4.5% year-on-year in May, following a 4.1% rise in April, according to the National Bureau of Statistics of China. The manufacturing sector thus remains one of the few strong drivers of activity, particularly supported by export segments.

The contrast with consumption is stark: retail sales fell by 0.6% year-on-year, marking the first contraction since the end of 2022. This signal is all the more notable as Beijing has multiplied targeted support measures in recent quarters, from equipment exchange subsidies to incentives for the automotive and home appliance sectors.

Investment in urban fixed assets is also contracting, weighed down by residential real estate and certain manufacturing segments. This drop in domestic demand, combined with a still-dynamic industrial supply, fuels concerns of an excess capacity set to flow onto foreign markets. However, these data are subject to revision and should be interpreted with caution given frequent statistical adjustments.

Residential Real Estate Lacks a Clear Stabilization Point

New home prices fell by 0.2% month-on-month in May, following a 0.1% drop in April. The monthly decline is therefore intensifying, despite initial stabilizations observed in some major metropolitan areas mentioned by local authorities.

The persistent decline in prices affects the wealth effect for households, whose savings are largely tied to real estate. It also complicates the financial situation for developers and local governments, as a portion of their income depends on land sales.

This context increases pressure on Beijing to enhance fiscal and monetary support, as the room for maneuver with already deployed tools (easing purchase conditions, lowering mortgage rates, programs to buy unsold inventory) still appears limited given the magnitude of the correction.

What This Means for Exporters and Commodities

For European and Asian investors, the message is twofold. On one hand, the resilience of the Chinese industry supports certain supply chains and intra-Asian trade. On the other hand, weak domestic demand weighs on exporters for whom China is a significant final market, particularly in luxury goods, automobiles, and capital goods.

Industrial metals (copper, aluminum, iron ore) are also exposed to this unbalanced growth profile, as real estate remains historically a major area of consumption. This issue adds to an environment of declining energy prices, following the easing observed in Brent oil prices mentioned in our article on the US-Iran agreement on the Strait of Hormuz.

The monetary calendar adds a layer of uncertainty. The effective fed funds rate hovers around 3.75%, and derivatives markets incorporate a probability of approximately 97% of maintaining the status quo at the conclusion of the June 17 meeting. However, the Fed's decision and new projections will only be known at the end of the day European time, and expectations can quickly change before the final announcement.