China’s mixed May economy: Retail up, factory output slows

China’s economic performance in May 2025 paints a mixed picture, with encouraging signs in consumer spending but noticeable slowdowns in industrial activity. As global trade headwinds persist, especially amid rising tariffs from the U.S., China’s domestic market appears to be the backbone of its short-term growth strategy. While retail sales exceeded market expectations, factory output growth decelerated slightly, highlighting the dual-speed nature of China's post-pandemic recovery.

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🛍️ Retail Sector: A Bright Spot in May

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Retail sales in China climbed 6.4% year-on-year in May, beating analysts’ projections and showing strong consumer resilience. This surge was largely driven by:

✔️ Online shopping festivals, particularly the popular “6.18” mid-year sales event launched early this year.

✔️ Tariff-affected goods being redirected to domestic consumers, creating temporary domestic oversupply and price drops, encouraging purchases.

✔️ Stronger domestic tourism and dining, fueled by several provincial stimulus schemes and travel subsidies.

✔️ Automotive sector recovery, as consumer interest in electric vehicles (EVs) and hybrids continued to rise with new subsidy extensions.

🏪 Key figures in the retail space:

Automobiles: +9.2% YoY growth
Online sales: +13.5%
F&B (Food & Beverage): +6.9%
Apparel & household goods: +5.3%

🧾 Consumer sentiment has improved amid stable job growth and gradually rising wages. The Ministry of Commerce reported that domestic consumer confidence has reached its highest level since November 2023.

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🏭 Industrial Output: Signs of Strain

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On the production side, industrial output increased by 5.8% YoY, slightly below April’s 6.1% figure. The slowdown is attributed to:

🔻 U.S. tariffs and trade restrictions, which particularly impacted electronics and high-tech machinery exports.

🔻 Decline in external orders, especially from Western Europe and North America.

🔻 Energy cost fluctuations, causing uncertainty in factory operating rates.

🔻 Labor shortages in certain provinces following seasonal migration patterns.

⚙️ Sub-sector data:

Manufacturing: +5.5%
Utilities: +3.8%
Mining: +4.2%
High-tech manufacturing: +2.1% (sharp drop from 4.6% in April)

While larger state-backed firms remained relatively stable, small and medium-sized enterprises (SMEs) experienced tighter profit margins and lower output efficiency.

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📦 Export & Import Dynamics

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The trade sector continues to navigate turbulence. May exports increased by only 1.2%, significantly lower than April’s 3.7% rise. The largest blow came from:

❌ U.S. exports, which dropped by a stark 35% YoY, largely due to recent U.S. tariffs on Chinese automotive parts, green tech equipment, and semiconductors.

❌ European demand also declined due to inflationary pressures and policy tightening across the Eurozone.

However, ASEAN and African markets showed increased trade volume, thanks to expanded agreements under the Belt and Road Initiative and growing Chinese influence in South-South cooperation.

Meanwhile, imports rose by 2.9%, led by increased energy purchases from Russia and Central Asia, along with agricultural products such as soybeans and corn from Latin America.

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📉 Investment and Real Estate

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Despite consumer strength, fixed asset investment (FAI) growth slowed to 4.0%, the lowest monthly figure since February. Real estate remains a major drag:

🏚️ Property investment dropped by 9.7% YoY, as the government maintains strict controls to curb housing bubbles and prevent developer over-leverage.

🏗️ Infrastructure investment, however, grew 6.5%, primarily in railway and urban transit construction projects aimed at boosting employment in inland provinces.

China’s National Development and Reform Commission (NDRC) acknowledged that while infrastructure remains a buffer, private sector investment remains tepid due to regulatory uncertainty and lack of credit expansion.

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💹 Monetary and Policy Response

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In response to these mixed results, the People’s Bank of China (PBoC) is expected to keep interest rates steady, while maintaining liquidity via short-term market operations.

🏦 Policy measures announced:

Expansion of consumption vouchers across 22 cities.
SME loan deferrals extended through Q3 2025.
Relaxation of local government bond quotas for infrastructure development.
A tiered tax relief scheme for low-margin manufacturers.

📢 Officials emphasized that “domestic demand will be the cornerstone of stable recovery” while urging businesses to prepare for “long-term external uncertainties.”

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🧠 Expert Opinions & Market Reactions

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🔍 Citi Research: “China’s economy is rebalancing faster than expected. Domestic services are surging, but export-linked industries will need government support or broader diversification.”

🔍 Oxford Economics: “The drop in manufacturing output is more structural than cyclical. Without fresh tech investments and talent reform, China risks losing edge in electronics.”

📈 Shanghai Composite Index rose 0.6% following the retail data release.

📉 The Yuan weakened slightly amid concerns about export competitiveness and ongoing capital outflows.

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🌍 Global Implications

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China’s economic health remains critical for the global supply chain. The bifurcation between retail strength and factory slowdown could signal:

Rising domestic substitution, reducing China’s reliance on Western markets.
Short-term global inflation control, as weaker Chinese exports cool international commodity demand.
Opportunities for regional neighbors, such as Vietnam, Malaysia, and India, to absorb some displaced manufacturing demand.

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📌 Conclusion

While China’s May 2025 economic indicators reveal resilience in consumption, headwinds in manufacturing and trade cannot be ignored. The government faces a delicate balancing act: sustaining growth without reigniting structural risks. Consumer activity offers hope, but industrial fragility and trade tensions—particularly with the U.S.—underscore the complexity of China's evolving economic story.

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