China’s economy started 2026 with surprising momentum — but the latest monthly macro data underscores that many of the country’s underlying challenges remain firmly in place.
On this week’s Trivium China Podcast, host Andrew Polk is joined by Trivium’s Lead Macro Analyst Joe Peissel to unpack the latest economic data and what it reveals about the increasingly uneven nature of China’s growth story.
The two discuss:
Why China’s economy is increasingly operating on “two tracks”
The continued boom in AI, semiconductors, clean energy, and export-oriented manufacturing
Why much of the rest of the manufacturing sector is struggling
The first year-on-year decline in retail sales since the pandemic
What collapsing auto sales reveal about the limits of Beijing’s trade-in subsidy program
Why consumer confidence continues to deteriorate despite policy support
Andrew and Joe also examine the growing constraints on policymakers as fiscal pressures mount across the country.
Overall, the discussion reveals an economy that remains remarkably strong in a handful of strategic industries — but increasingly fragile everywhere else.
Transcript:
Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I am joined today once again by our Lead Macro Analyst, Joe Peissel. Joe, how are you doing, buddy?
Joe Peissel: Hey, Andrew. I’m good. Thanks, mate. And I’m pleased to be here as always.
Andrew: Yeah, great to have you on. I am back in Washington, D.C. and getting settled in after a week in Shanghai. So, it’s good to be back on the pod and glad to have you on. We are going to talk today about the latest monthly macro data as we do each month. And this one in particular is going to be quite interesting because the macro data, some of it’s very bad. And it also really just shows how unsustainable, I think is a really good snapshot of how unsustainable China’s growth model currently is.
So, I don’t want to give away too much, but we’re going to getting into all that with Joe. But of course, before we do, we got to start with the customary vibe check. Joe, how’s your vibe today?
Joe: My vibes are good, Andrew. I live about three minutes from the sea. So, on my lunch break, I went for a swim, first swim of the summer. I mean, it’s pretty horrible because the sea’s still freezing and, typical British weather, it started raining halfway through my swim. But I came out of the sea feeling invigorated and still invigorated for this podcast.
Andrew: Amazing. I love that. I love that. Wow. I didn’t realize, I knew you lived close to the water, but I didn’t realize you lived three minutes away. That’s awesome.
Joe: Yeah, I can see it. I can see it from my window. I’ve timed it. It’s literally a three-minute walk to the beach. It’s glorious.
Andrew: That’s amazing.
Joe: I’m sure it will be glorious once the sun comes out and it stops raining mid-swim.
Andrew: That is one thing that I don’t love about Washington and didn’t like about living in Beijing. I like to be close to the water. So maybe at some point in my life, I will be living on the water again. But I’m jealous of that. And it’s a great vibe check. Love that you get to dip in the ocean in the middle of your lunch break. My vibe is still jet lagged just back again from China, but it was great. I mean, I talked about it a little bit last week, like we had 10 Trivium people together in one room, which almost never happens.
I think that’s the most people, most Trivium colleagues that we’ve had together physically in one place ever. So always pumped, always interesting, also to hear from executives on the ground what they’re seeing, some really interesting anecdotes, specifically on kind of what the local government chicanery around still doing the audits, the back taxes, all that stuff. So that was really interesting. I will say one of my colleagues said I need to be more energetic at the beginning of the pod. So, I’m trying to bring some of that energy.
Feedback is good. I welcome constructive criticism. So anyway, that’s a kind of scattershot vibe check, but that’s all going into my vibe today. So, with that out of the way, I also have to do quickly the housekeeping up top. The number one thing today is just to let listeners know that we’re going to be off for the next couple of weeks. I’m going to be on vacation. I had hoped to maybe pre-record a couple of pods, but unfortunately, time did not permit that.
And so, we’re going to be off until the first week of July, but that will give us a chance to kind of reset, get some new content going. So sorry for listeners that you’ll have a couple of weeks without us, but we will be back in your feed soon. Otherwise, the typical housekeeping reminder, we’re not just a podcast. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes policy towards China out of Western capitals like D.C., London, Brussels, and others.
So, if you need any help on that front or on navigating domestic policy in China, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in receiving more Trivium content, check out our website, again, triviumchina.com, where we’ve got a bunch of different subscription products, both free and paid. They’re all Chinese policy intelligence, Chinese policy tracking, monitoring, and analyzing products, but they’re products around tech policy, markets policy, any kind of policy that’s going to impact business.
So definitely check those out if you haven’t had a chance to yet. You will definitely find the China policy Intel option you need on our website. And finally, I always say it, but I mean it, tell your friends and colleagues about Trivium and about the podcast. It helps us to grow the listenership, grow the business, which is what we’re trying to do here. So, we really appreciate those word-of-mouth recommendations. All right, with that stuff done, Let’s get into it, Joe.
So, I already previewed it a bit. China’s economy slowed significantly throughout May after really a pretty solid start to the year, we should say. But what’s the big takeaway from the May data? What’s your headline?
Joe: So, I think the big headline is this is a clear two-track economy now operating in China. And by that, I mean that manufacturers and the export base that’s related to AI and to clean energy is booming and continue to boom throughout May. I mean, the numbers are just striking. So, exports grew by almost 20% of which semiconductor chip exports more than doubled, computer hardware up more than 70%, car exports and batteries up more than 40%, just crazy numbers, absolutely booming in these segments of the economy. And of course, all this export activity, unsurprising, it’s feeding through to manufacturing activity.
So, manufacturing output of those industries also grew really strongly. Output of semiconductors and consumer electronics grew by double digits. Manufacturing of cars almost hit double-digit growth. So, really strong exports leading to really strong manufacturing output in one part of the economy. But when we look at China’s manufacturing base, why I refer to it as two-track is put AI and clean energy aside, and the rest of China’s manufacturing sector, particularly that that’s more related or more reliant on domestic demand, isn’t performing anywhere near as well.
So, we could think of things like metals processing, or petroleum processing, or textiles production, even things like food manufacturing, beverages, all of this stuff that some of it is exported, but the proportion of exports is much smaller than AI and clean energy. So, these more domestic-oriented industries, the manufacturing either grew really slowly, or in a lot of cases, manufacturing output actually declined. And clearly that’s domestic demand story going on. So that’s what I mean by a two-track.
You’ve got one part of the economy kind of heavily reliant on exports and booming. The other part of the economy that’s more reliant on domestic demand is struggling to grow or, in some case,s actually declining.
Andrew: Yeah, we’ll get into the domestic demand piece of that in just a minute. Something I was just thinking about while you’re saying that is, you know, when you break it down like that, everyone obviously externally is unhappy with China’s export-driven model currently. But it kind of sounds like, from this data at least, China’s basically riding the ai and clean energy boom, as are many economies. The U.S. economy is riding that boom, of course, is more domestic, but when you think about it that way, a lot of their exports are growing because that’s where the specific growth in industry is throughout the globe, and also because these companies are really competitive in these areas — AI and chips production and related items and clean energy in particular.
What do you think about that? In a way, should we give China, I don’t know, not more of a pass, but they’re clearly just hitching their ride or hitching their wagon to a global economic trend in a way? I don’t know. What do you think about that? Does that provide any area for China to push back against the European export-dependent economy model in your mind?
Joe: Well, I mean, I’m not sure whether, from a European or from a Western policymaker perspective, I’m not sure whether that’s a reason to give China a pass because it’s still concerning. I mean, they’re seeing a hollowing out of their industrial base because China is so competitive. That’s concerning from a Western economic perspective. But I mean, I certainly think we can give China credit for running an extraordinarily successful industrial policy over a number of decades, right? It’s this tried and tested playbook of identify kind of upcoming and emerging technologies, throw loads of money at it, utilize its ultra-competitive domestic market to build world-leading firms, and then start exporting.
And we see that with solar, with batteries, with EVs, you name it. It’s the same tried and tested playbook, and it works really well. The consequence of that is that China then becomes this integral part of the global manufacturing supply chain. And so even if countries want to diversify, or even if countries are mad with Beijing’s policy toolbox. There’s nothing they can really do about it because they’re reliant on Chinese intermediate inputs, or in some cases, Chinese final products to grow their own industrial base or to grow their own economies. I mean, think about decarbonization.
Lots of economies can’t decarbonize without Chinese clean tech. So, I don’t think it’s a case of giving China a pass on its industrial policies, but it’s more just about giving it credit. It’s worked really well. And this is part of the reason why China’s achieving such strong growth in these areas.
Andrew: Great points. Yeah, I think that’s a good framework, giving them credit for being able to look ahead and say, you know, this is what seems to be upcoming, and owning kind of the clean tech space in particular, I think makes sense. Of course, totally understand all the complaints, you know, the subsidies and competing on a level playing field. But as Cosimo, our colleague Cosimo Ries, said last week, you know, in many cases, especially in Europe, like local companies have had the chance to step up and just decided they don’t want to do it, right?
This isn’t an industry they want to get into, various parts of the clean tech supply chain. So, again, not trying to like, as you say, give China a pass per se. I’m just trying to kind of tease out whether this issue is a little bit more complicated than the politicians often seem to make it.
Joe: Yeah, it’s not as simple as saying subsidies and an unlevel playing field. It doesn’t always make sense. Actually, this is a bit of a diversion, but I always chuckle when I think one of the things that people complain about is, or politicians might complain about, is Chinese government providing cheap credit to their manufacturing base, along with all of these other support, kind of overlooking the fact that the ECB ran negative interest rates for the best part of the decade or something like this.
It’s definitely more complicated than simply saying subsidies and an unlevel playing field. China also just has a very successful, ultra-competitive industrial policy toolbox.
Andrew: Totally. I mean, again, we don’t want to belabor this, but there are two things I will say. One is I recently, so on the American side, I often talk to U.S. government officials, U.S. policymakers around like, should we at least think through how U.S. policy might be contributing to the imbalance? Because, right, this is a global economy. An imbalance on China’s side is an imbalance on someone else’s side by definition, right? And so, everyone seems to think China is the motive actor.
But at the same time, are we undertaking policies that are sort of keeping us from being as competitive or keeping us running very large current account deficits? Which I think the answer is almost certainly yes in the latter case. The other thing, I saw something online recently. This is kind of zombie-brained China takes where someone was talking about how, yeah, China’s auto industry is competitive, but they learned from and stole the tech from the Americans.
And it’s like, there’s like very little U.S. or other tech in Chinese EVs. Like, these are just totally different products. Just because they carry you on the road doesn’t mean they’re the… Like the EVs and ICEs are totally different products. And U.S. companies have proven they really can’t compete on EVs because they aren’t good at the tech and the software stuff. They’re really good at making the engines. But, you know, the tech and the software, and then the internal part of the car is actually pretty easy.
You see that because companies in China, like Xiaomi or Huawei, who are tech companies, who’ve never made a car before, can spin up a pretty decent model in a few months. Anyway, this is all another pod, but I just kind of wanted to layer in some of these bigger ideas to the monthly data. All right. So that’s the story on the strength of the economy, very clearly tied to AI, clean energy, and particularly to the export of those products, those industrial products. The issue obviously is domestic demand. You already previewed it, that it was not great, but talk to us a little bit more about what that looked like.
Joe: Yeah, so May was pretty significant in that retail sales of consumer goods declined. They fell by 0.6% in May. That’s the first decline in over three years. So, the last time retail sales of consumer goods declined, this is year on year, right? So, May 2026 relative to May 2025. The last time there was this year-on-year decline was during the pandemic. So, we’re talking over three years ago. So that’s pretty significant symbolically, if nothing else. And some of the biggest drivers of this decline were these big-ticket items, which we’ve talked about previously.
So, autos, home appliances, furniture. And these things have fallen by double digits or close to double digits. In autos’ case, I mean, sale of autos collapsed by, I think in value terms, 17%, 18%. And in unit terms, in models, I think it’s over 20%. It’s just huge decline. Now, why is that significant? Well, that really tells us that the government’s trade program, this subsidy-driven consumption stimulus has totally run out of steam. It’s no longer working. And we’ve talked about this before, so I won’t labor this point, but that’s to be expected because what trading subsidies do is encourage consumers to upgrade early.
So, it pulls forward future demand. So as a consumer, if I was thinking of buying a car next year, maybe I’ll buy it this year instead because I can take advantage of the subsidies. So, we saw a huge surge in sales of these items, these same big-ticket items in 2024, 2025. It’s kind of no surprise that the program’s now come to a standstill, it’s no longer stimulating demand for these items. But consumption weakness goes well beyond just these big-ticket items. So, we saw sales in a broader range of categories as well.
Things like sports equipment, recreational equipment, jewelry sales, things like this. So, this is really reflective of declining, well, a decline in consumers’ willingness to spend, a decline in consumer confidence. Consumer confidence, as measured by the Stats Bureau, they have a Consumer Confidence Index. It’s household survey level data. The most recent data was for April. That’s dropped to like a 12-month low. So consumer confidence is declining again from an already very low base.
I think there’s maybe a couple of caveats to this doom and gloom. So, I think the first thing to say is because autos are such a big part of retail sales just because they’re very expensive, if we exclude autos, so retail sales excluding autos, that grew by 1.1%. There’s nothing to shout about, but it’s just to say this decrease in retail sales, this first year-on-year decline in three years, that’s driven by the decline in autos if we exclude that. There’s still very modest, very low growth in overall sales. The other thing to point out, which is slightly more positive, is spending on services. We estimate that grew by 4.6%.
That’s an estimate because the MBS doesn’t release monthly growth rates for services. But we estimate it’s grown by about 4.6%. That’s a decent rate, right?
Andrew: Mm-hmm.
Joe: Although with a caveat that it’s dropped sharply. So, for comparison, in April, retail sales and services grew by 5.9%. So, it’s a sharp slowdown. So overall, it’s a very bleak consumption picture. I just want to kind of point out those two caveats to say this, like, I mean, you could say there’s kind of pockets of strength, perhaps, in the consumption picture, but overall, it’s very bleak. And it gets bleaker because there’s very little upside for consumption. When we think about, okay, income growth is slowing. In real terms, that slowdown is going to be even sharper because of this uptick in inflation from the Iran war.
We’ve just discussed that the government’s flagship consumption support policy, the trade-in program, has fallen flat. And there’s really limited fiscal maneuverability from the government side to support consumption. So, not only is consumption doing pretty badly now, there’s very little upside for consumption growth in the coming months.
Andrew: Not a pretty picture. I have a few follow-ups. One is, you know, just to highlight for folks, one of the reasons we spend so much time on the auto market is because it’s a, I don’t know if micro is the right word, but it’s more of a micro issue than a macro issue, but it feeds into it and informs the macro picture so substantially, right? As you say, it’s a big chunk of any individual, any household’s income or purchasing basket in any given year or really lifetime, I guess.
It’s a big driver of consumer growth, consumption growth, and also industrial production, exports, and of global competitiveness between China and the rest of the world. So, it’s a sort of industry with outsized importance. So, it’s one reason we spend so much time on it. And obviously, Chinese companies sort of stepping onto the world stage in this industry has been very abrupt in some ways. I mean, in some ways, it’s been a long time coming, but also just seems to have happened very suddenly in terms of Chinese EVs being everywhere.
So, that’s just one thing for listeners to keep in mind is that’s why the auto market’s so important, or one reason. The other question I wanted to ask you is what’s your read on, and I guess we’ll get into this when we talk about the fiscal piece in just a minute, but why aren’t officials doing more to support consumption? We’ve been having this conversation for years, every month for the past several years, but it was pretty obvious that consumption was going to contract this month.
That was all the estimates from various economists ahead of the data release, in large part because the consumer trading program or the consumer goods trading program has been losing steam and was funded at a lower level this year than it was last year. So, this seems like something that could absolutely be seen in advance by policymakers and yet no real action. What’s the story there, you think?
Joe: I mean, that’s a huge question. That could be a podcast in and of itself — Beijing’s reluctance or inability to stimulate consumption. So, one part of the puzzle is kind of this ideological preference for supply-side stimulus. And so, when Beijing releases a consumption support policy, generally, it’s through supply-side stimulus, supply-side support. So, for example, policymakers, they will argue they’re trying to boost consumption by unlocking latent demand, which is essentially the idea that consumers want to spend their money. It’s just there’s not an adequate supply of high-quality goods or services for them to spend their money on.
So, policymakers think, okay, well, if we have a supply-side stimulus to improve or to expand the supply of goods and services, then consumers are going to spend more. So, I think this is one of the puzzle. Actually, Beijing releases lots of “consumption support policies.” It’s just they’re generally geared towards supply-side stimulus, which doesn’t really work in the current macroeconomic climate. The second thing to say is there’s been lots of nudges towards trying to boost consumption. So let’s think about the trade-in program this year. You’re right to point out the level of subsidies were reduced, but the scope of the program was expanded to include things like AI-related products, like smart consumer watches, things like this.
So, there’s actually an expansion in program eligibility into new goods types. There’s a subsidy for consumer loans to encourage consumers to take loans to spend on goods and services. So, there’s been kind of some nudging around the edges. It just hasn’t been that effective. One of the reasons is because of a lack of fiscal firepower, which is really like the second part of this puzzle, which is like the policymakers, particularly at the local level, don’t have the fiscal maneuverability to stimulate consumption.
Policymakers at the central level don’t really have the desire because of these ideological reasons. They’d rather use that money for infrastructure stimulus or for supply-side support. I think those are the two of the main reasons.
Andrew: Well, so a couple of things. One, I want to share this anecdote, which I sort of alluded to earlier in the pod. I had a bunch of good anecdotes from my trip to China, but one of them, you talk about fiscal maneuverability and all this stuff, the chicanery around local government finances. We were talking to a company in China last week, and they were talking about how they had been waiting to get some subsidies for an investment; foreign company, which also gets subsidies.
People should remember that foreign companies also receive subsidies in China, but had been waiting and waiting, waiting to get the subsidy for an investment they were making — excuse after excuse, apparently from the local government. And then they had the ceremony, I believe, to mark the investment or kick off the investment. And they got the subsidies announced or whatever, officially paid around that ceremony. And then the very next day, the local government gave them a tax audit and fined them the exact amount of subsidies they had just received in back taxes the very next day.
And I just like, you multiply that times a million, and that’s happening just all over China. Dinny McMahon, our colleague, is pointing out that that’s basically local government fiscal austerity, right? China style. But I just thought that was too good of a story.
Joe: Not even subtle, right?
Andrew: Oh, not at all.
Joe: They could have waited a week or something.
Andrew: Yeah, yeah, yeah, exactly. And then the other thing I was going to ask you about on the consumption side, this is another company, this wasn’t for my trip, but a company we’ve been working with that’s a consumer-facing company. We were working with them on some conversations, basically with kind of public comments that they wanted to make around consumption. And they were making the argument, which I thought was smart, and I think partly true, but also maybe partly just diplomatic, which is they’re saying it’s not that consumption’s weak fundamentally.
It’s that consumers are becoming more value-oriented and more discerning. And so, companies have to bring better value if they want consumers to buy their products. What do you think of that as a framing for what’s going on? I guess it’s not mutually exclusive. Of course, when consumer confidence goes down, consumers become more discerning. But I don’t know. Can you just talk me through…? Sorry, I also think that’s actually a good framing for a company to take and think through.
Because whether or not it’s because macro consumption is weak or consumption is weak from a macro level, it is true that you’ve got to provide more value to the Chinese consumer, to find a way to do that. But anyway, I just wondered what you thought of that as a framing.
Joe: I think that’s quite a smart way to think of it. Particularly as China has a growing middle class, they kind of satiate their demand for low quality or for cheap, accessible goods and services. And so, you can kind of imagine that their demands also move up a value chain, right? They start to demand higher quality goods and services, which don’t necessarily exist at the moment or aren’t supplied, there isn’t adequate supply.
I mean, that actually goes back and gives weight to policymakers’ idea about trying to unlock latent demand.
Andrew: 100%.
Joe: Yeah. And so maybe there’s some truth behind that. Maybe this latent demand approach is part of the formula that’s needed for trying to unlock consumption. I think that’s probably part of the story. I mean, if you look at the data, there’s undoubtedly other structural factors at play here. Collapsing consumer confidence, slowing income growth, dropping property wealth. All these things are going to constrain consumers’ willingness to spend as well. But I think there’s some truth to that. I think in a similar vein, there’s also an argument that if you look at China’s consumption, not in terms of value, but in terms of volume, so you could think about, I don’t know, the number of cars per capita or the number of shoes purchased per capita, then in terms of volume levels per capita, China’s consumption isn’t that far off more developed economies.
Part of the reason in value terms it’s much lower is because the quality of these goods and services they purchase is much cheaper because the quality is lower. And so again, this kind of feeds into the idea that perhaps one of the ways to unlock more consumption is to actually try and move up the value chain, expand provision of higher quality goods and services, which is super relevant from a company perspective, right?
Andrew: Yeah. Yeah, that’s a really good point. Yeah, I think we always poo-poo the idea of this, like, oh, there’s just not the types of consumer goods that people want, but then maybe there is some validity to that. And definitely, companies should basically be thinking that way. And also, I mean, they should be thinking, like, we need to bring more value, right? Because in this kind of environment, consumers are going to be more choosy. But also, everything’s true when it’s China. Sort of everything’s true at the same time, right? So it can be weak consumer confidence. It can be more discerning. It can be moving up the value chain. It can be a weak macro environment, kind of all rolled into one.
Joe: I think even if we accept that unlocking latent demand is part of the puzzle, the reason it’s not working at the moment is because if Beijing plays or rolls out these policies without addressing the other macroeconomic issues, like slowing income growth or collapsing consumer confidence, then only increasing latent demand without addressing these other issues isn’t going to stimulate consumption. Consumer willingness to spend still remains low.
Andrew: Yeah. And a lot of that’s in the property market, which we’ll get to in a minute, which of course has undermined Chinese wealth and Chinese wealth expectations. But before we go to property, the other piece related to fiscal weakness, so we talked about lack of government spending to support consumption, but also fiscal weakness or the lack of a fiscal expansionary environment has undercut infrastructure spending as well. So, talk to us about the infrastructure side.
Joe: Infrastructure declined 9.5% infrastructure spending in May, which is just a, I mean, it’s a striking data point when we think about, A, the importance of infrastructure traditionally as a growth engine, but also how vocal Beijing has been about boosting infrastructure this year. So, it’s remarkable that after all this lip service policymakers have paid to infrastructure, it’s actually declined. This is the second consecutive month of declining infrastructure spending. And there’s a couple of reasons behind this. So the first is related, and Andrew, you and I talked about this the last time I was on the pod, so I won’t kind of go into too much detail about this, but state-owned enterprises, they are now obligated to remit a larger proportion of their profits to central government than they did before.
And it’s a huge step up. In some cases, it’s up to a 100% increase. So, the amount of profits, the amount of retained earnings of state-owned enterprises transferred to the government has doubled in some cases. So, this is hammering, absolutely hammering their retained earnings. They’re holding less capital. And as a consequence, they invest less because they use the capital as an equity injection into any sort of infrastructure project. So, that’s part of the reason why infrastructure has declined is because SOEs have less retained capital because of this new policy. And the second reason is special purpose bonds, which is a local government debt instrument, which traditionally was used to fund infrastructure investment, is now being diverted to other things.
So, infrastructure-related SPBs in May dropped, the issuance of infrastructure-related SPBs dropped by 60% in May. And that’s because a big chunk of these SPBs are no longer being earmarked for infrastructure. They’re being used for things like paying down hidden debt, or they’re being used for land buybacks, which is really a property support policy. The idea being if a property developer has bought land and they haven’t utilized it, so they’re sitting on this unutilized land, then the local government buys that land back off the property developer. The idea being to try and inject liquidity into property developers, which have a huge credit crunch.
So, kind of a good idea in principle, but this unintended consequence of crowding out infrastructure investment because all this money is instead being spent on paying back hidden debt and land buybacks. And as a consequence, infrastructure is now declining.
Andrew: Just another thing to undercut domestic demand. I think when we talk about domestic demand, we often kind of emphasize the consumer part of demand, but infrastructure and investment is also part of domestic demand, right? And so, just further sort of weakens the domestic economies need to buy up products. So also translates into weak imports. And, you know, I was actually, again, on my trip to China, one of the other presenters at one of the things I was at was talking about, like, what is China even going to import in the future? Like, with the property sort of realignment, they are not importing anywhere near the commodity base they were for construction. And then, even we’ve seen the pieces in The FT and others recently that China’s really ratcheted down its oil imports.
And it’s like, is China going to be importing anything for the rest of the world? So, that’s also a problem for other countries, right?
Joe: Yeah. Kind of just to real briefly touch on imports because import growth was really strong in May, but that’s a little bit misleading. That’s because of a huge increase in the cost of commodities and raw materials. In volume terms, China’s import of commodities actually decreased year on year.
Andrew: Yeah. And that seems to be a trend.
Joe: Yes.
Andrew: Okay. Last piece, property sector. You already touched on it a little bit, at least to how developers and their financing are sucking up some of the fiscal resources that would otherwise be diverted to, or not diverted, but spent on infrastructure. But talk to us about what you’re seeing in the property market, which the previously all important property market, increasingly less important, but still highly germane to the outlook for the economy. What do you see in there?
Joe: Yeah, increasingly a smaller part of China’s total economy, but still dragging economic activity as of now. So, for a while, we’ve been tracking the property sector and saying there’s kind of these very early tentative signs that the property market may, at some point, start to bottom out. I’m being really tentative in my language there, right? But what I mean by that is home sales, the decline in home sales is moderated for six consecutive months. That’s really positive, actually, if we’re trying to look for the market bottoming out.
Same idea of house prices. House price declines have slowed. And in first-tier cities, prices are now growing. So, all this stuff kind of thought, okay, well, maybe this is the beginning of a bottoming out. But May’s data kind of pours cold water on that idea. We saw an acceleration in the home sales decline. So, it kind of reversed this six consecutive months of decline moderation. And other real estate metrics, their decline also quickened. Real estate investment declined by almost 25%. That’s the highest on, I don’t know how long. It may be a record drop. I’m not sure. Don’t quote me on that.
But earlier this year, it was declining by somewhere between 10% and 15%. It’s now accelerating April to about 20%, in May to about 25%. So, kind of, again, a reversal of what we are hoping was the beginnings of a bottoming out of the real estate sector. I think, particularly when we think about real estate investments, real estate construction, these metrics are going to keep falling for a long time, even if we do eventually see a stabilization in home sales and prices.
And that’s because right now, property developers are sitting on a huge amount of unsold stock, essentially a massive infantry overhang, which they want to sell down before they start building new properties. And interestingly, we’re also seeing a shift in consumer preferences away from new homes towards secondhand homes, which are cheaper, and there’s not a risk of completion delays and things like this. So, I mean, it’s kind of much the same with the property sector, yet this decline is ongoing. These tentative signs we thought might mean at the beginnings of a bottom out have reversed in May. Yeah.
Andrew: The drama continues.
Joe: Yeah.
Andrew: We keep thinking there’s got to be a bottom at some point, but it’s a protracted adjustment. Interestingly, I think we’ve talked about this on the pod, the policymakers have even stopped, in some documents and some for a, talking about property in the context of the macro economy. Instead, they talk about property policy in the context of social policy. Like, here’s what we want the housing market to look like from an affordability standpoint, from an urban renewal standpoint, from a livability standpoint.
I mean, they’ve officially made the transition. This is not a macro growth driver anymore. And so, this is the new world we’re in. Okay, so we’ve gone through the main parts of the economy. Let’s wrap it up. So, two kind of related questions. Put this in context. So, we had a really great beginning of the year. As I said, Q1 data was better than I think policymakers expected, most analysts expected. Did Beijing just bank Q1 and say, “Okay, that got us a long way to where we wanted to go in terms of the growth target for the year. And so, we can just kind of take our foot off the gas pedal”? Or what’s going on? And then this data was bad in May. Is it going to get worse?
How bad is it? Was it hair-on-fire bad? Or I don’t know. Just talk to us about the contextual piece and what you expect going forward, both from the economy and from policy.
Joe: From a policy perspective, I don’t think we can characterize it as policymakers taking their foot off the pedal so much as there’s been a bunch of external events which have really thrown a spanner in the works, right? Iran war, imported inflation, tariff war, all this geopolitical uncertainty. So yeah, whilst I don’t think we can say, “Okay, well, policymakers just kind of chilled out and have taken their foot off the pedal,” what I do think we can say is that they’ve been kind of remarkably consistent in their reluctance to unleash any big bank stimulus. And we say that in the monetary policy side and the fiscal policy side. So, in many respects, policymakers have been very disciplined. Despite these external events, they’re sticking with their game plan.
Now, the outlook for the year, a lot of it depends on exports, right? Because that’s the main growth driver, not just through the trade surpluses that contribute to GDP, but through supporting manufacturing and the spillover on the labor market and wage growth and things like this. Now, the issue being, as we discussed earlier in May, China’s export growth was really centered on two areas — AI and clean tech. And that leaves the economy very vulnerable to changes in geopolitical dynamics, right? So, I mean, that’s certainly something to look out for is what’s going to happen with China’s trade dynamics.
In terms of GDP overall, I don’t think we’re at the stage where we should be panicking and thinking the economy is not going to hit its growth target. Remember, Beijing has flexibility this year. Their target’s 4.5% to 5%, or 4.5%. I think it was 4.5% to 5%, yeah. They hit 5% growth in Q1. So, they’re way above the baseline of their targets. And I think there’s enough potential tailwinds in terms of fairly robust services growth, fairly robust manufacturing output, obviously, really strong export growth that’s going to get the economy over the line.
But given all these challenges we’re seeing, particularly the decline in retail sales, the reversal in the property sector, the slowdown in the property sector decline, which is now accelerating, I mean, we’ve adjusted our expectations. We don’t think the economy is going to hit the target, at the top range of that target towards the 5%. It’s going to be close to the 4.5%, 4.6% area. Yeah, kind of the long and short of it is there’s a bunch of headwinds, but I think there’s sufficient tailwinds to get the economy over the line.
Andrew: Yeah. I think we often sort of focus on the headwinds to growth and forget that there are still some tailwinds. This is an economy that still has some fundamental strengths. Obviously, advanced manufacturing being one, and as you say, consumer services being increasingly one as well. You’re 100% right that the external environment is going to be important, which is, just to tie that back to our conversation last week or my conversation last week with Joe Mazur and Cosimo Ries, this could become an issue if Europe decides it’s ready to get into more of an overt trade war with China.
But I did like there, again, I think it was an FT headline that said something like, if Europe starts a trade war, China will end it. I was like, oh, okay. Well, really appreciate you walking us through all this. Just for listeners, we have a whole service that goes through macroeconomics and dynamics that impact anyone who’s, first of all, running business in China, but also investors thinking about China, especially from a macro standpoint. It’s our China market service. Joe does a bunch of work on that. We have a whole team that works on that. So, a little bit of an organic plug there for that work.
As I said at the top, check out our website or reach out to us and we can tell you some info about that. The team does really great work. And we’re going to throw some of Joe’s charts in the pod notes this week because some of them are quite striking, especially like the absolute reliance on semiconductors and clean tech when you see it in a chart compared to the other industrial parts of the economy. It’s pretty striking. So, be on the lookout for that. Otherwise, Joe, thanks, man, for the time. Really appreciate it. Really appreciate your insights today.
Joe: Yeah, cheers, Andrew. It was good fun, as always.
Andrew: Yeah. All right, man. We’ll see you next time, and thanks, everybody, for listening. Bye, everybody.
