China's retail sales drop for the first time since 2022 as households pull back on cars and appliances

The headline number

China's retail sales fell 0.6% in May from a year earlier, the National Bureau of Statistics reported on Tuesday. It was the first year-over-year decline since December 2022, when a wave of coronavirus infections swept the country after Beijing dismantled its "Covid zero" restrictions. The drop was a significant miss compared with the 0.2% decline forecast in a Bloomberg survey, which itself had aligned with April's lacklustre 0.2% growth.

The international environment is complex and volatile, and domestic high temperatures and heavy rainfall disrupted market supply and demand.

What dragged spending down

The sales slump was driven largely by lower purchases of big-ticket items. Auto sales fell 22.3% year-on-year in May, according to data from the China Passenger Car Association. Home appliances and furniture also posted declines. New home prices fell last month in 67 out of 70 major cities surveyed, NBS data showed, underscoring the persistent property-sector crisis that has eroded household wealth.

All told, the May data suggest that the economy is still struggling, though we expect strong exports to provide a prop to gross domestic product growth this year.

The decline was also notable because higher energy costs were expected to lift retail sales. Gasoline prices have risen following the closure of the Strait of Hormuz, and retail sales figures are not adjusted for inflation. After accounting for rising consumer prices, the real spending drop would have been steeper.

The export engine keeps running

While domestic demand weakened, China's export machine continued to hum. Exports hit a record in April and climbed even higher in May to $376.8 billion, according to data released last week by China's General Administration of Customs. Industrial production rose 4.5% year-on-year in May, an improvement from April's 4.1% and above the 4.4% forecast by Bloomberg-surveyed economists. Output of electric cars and other high-tech products was especially strong.

China's supply side remains relatively strong: exports are growing rapidly, industrial production is holding up well, and high-tech sectors continue to expand. However, domestic demand remains weak.

Investment and the property overhang

Fixed-asset investment slid 4.1% year-on-year in the January-May period, a significant widening from the 1.6% drop in January-April. Investment by private sector companies was particularly weak, even after excluding the deeply troubled real estate sector. The property market remains a core drag: new home prices fell in 67 of 70 major cities, and the sector's downturn has left millions of consumers reluctant to spend.

Policy response and trade tensions

Weak retail sales data will put pressure on Beijing to consider policy measures to stabilise consumption. More policy "fine-tuning" will likely come in July after second-quarter GDP data is released, said Zhiwei Zhang of Pinpoint Asset Management. Beijing is targeting overall growth of 4.5–5% this year, though soaring energy costs and Middle East uncertainty have complicated the picture.

China's increasingly bifurcated economy, marked by weak domestic demand and growing reliance on foreign consumers, is expected to be a topic of discussion at the Group of 7 summit underway in southeastern France. The European Union has been weighing possible measures to limit imports of subsidised Chinese goods. China's trade surplus did not reach another monthly record in May because higher oil prices increased the cost of imports, with China partly offsetting the impact by importing fewer barrels of oil than usual.

A luxury bellwether cools

Separately, Laopu Gold, one of China's hottest consumer brands, is showing signs of losing momentum. Monthly sales at the premium gold jewellery maker's physical stores declined by mid-double digits year-on-year between March and May, while its share price has slumped and the broader gold market has sold off.