China Macro: May data confirm supply-side driven rebound

China’s activity data for May were in line with our view that April would show the nadir of the contraction in activity following the broadening of lockdowns in March/April. At the same time, the data confirm that the recovery is still quite unbalanced. The rebound is led by the supply side, reflecting China’s gradual reopening and measures taken to address bottlenecks in production and transport.

Industrial production came in stronger than consensus expectations, showing annual growth of 0.7% yoy (April: -2.9%, consensus: -0.9%), with the car sector showing a sharp rebound. Urban fixed investment did slightly better than expected, at 6.2% yoy ytd (Jan-Apr 6.8%, consensus: 6.0%). Retail sales continued to show contraction in annual terms, at -6.7% yoy (April: -11.1%, consensus: -7.1%).

This illustrates that consumption once more is lagging in the recovery process, with consumer services such as restaurants/catering still struggling. Also, investment and sales data point to the fact that the property sector needs more time to recover from the lockdowns-related slump.

Meanwhile, the unemployment rate dropped back to 5.9% (April/consensus: 6.1%), although youth unemployment reached a record high of 18.4%. Bloomberg’s monthly GDP estimate came back in positive territory, at 1.8% yoy (versus -0.7% in April).

We expect growth momentum to improve in the second half of this year, partly reflecting ongoing targeted/piecemeal easing and a relaxation in macroprudential regulation including for real estate. Still, the renewed tightening of Covid-19 restrictions in megacities such as Shanghai and Beijing over the past week shows that uncertainty remains high, with risks tilted to the downside.

All in all, this explains why our 2022 growth forecast currently is approximately one percentage point below Beijing’s growth target of 5.5%.