China's May retail sales fall for first time in over three years

China's economy showed increasing unevenness in May, with retail sales falling for the first time in over three years and investment slumping, while industrial output picked up pace.

Tuesday's data highlighted a two-speed growth pattern in the world's second-largest economy, with factories buoyed by surprisingly resilient exports but domestic demand worsening amid a multi-year property downturn.

Retail sales, a key gauge of consumption, slid 0.6% in May, reversing April's 0.2% rise and below the estimated 0.0%. It was the first monthly fall since December 2022.

Even the five-day Labour Day holiday failed to lift consumers' mood, and the impact of the government's consumer-goods trade-in scheme is fading gradually. A high base from May last year also contributed to the decline.

"The weak retail sales data puts pressure on the government to consider policy measures to stabilize consumption. I still expect policy 'fine tuning' will come in July after second quarter GDP data is released," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

By contrast, industrial output rose 4.5% in May from a year earlier, picking up from 4.1% growth in April, data from the National Bureau of Statistics (NBS) showed. The reading beat expectations of a 4.3% increase in a Reuters poll.

A surge in global AI investment and related tech demand has helped the world's biggest manufacturer offset the export hit many had expected from the Iran war, but a 19.4% export gain has yet to filter through to domestic consumption.

The fragility was evident in the auto sector. A downturn in domestic car sales extended into an eighth consecutive month in May, underscoring softening demand in the world's largest auto market, where pressure is likely to persist through the rest of the year.

"Several divides characterised the economy in May: the divide between domestic and external demand, the divide between AI and the traditional industries, and the divide between goods retail and services consumption," said Xu Tianchen, senior economist at the Economist Intelligence Unit.

Xu expected economic growth in the second quarter to slow to 4.5% from 5% in the first.

"For full-year 2026, achieving the growth target of 4.5-5% won't be difficult, but soft domestic demand still warrants policy intervention in the second half."

Investment Slump Deepens, Property Drag Persists

Investment data was also much weaker than expected. Fixed-asset investment fell 4.1% in the first five months of 2026, following a 1.6% decline in January-April. Economists had expected a 2% fall.

NBS spokesperson Fu Linghui said the decline was due in part to high temperatures and heavy rain in some regions as well as the transition from old to new growth drivers.

China still has ample room for investment in future, with new urbanisation, rural revitalisation, the development of "new quality productive forces" and improvements in public services all requiring support, Fu added.

Property investment extended its decline in the first five months, dropping 16.2% compared with the same period last year after falling 13.7% in January-to-April. Property sales and new construction also fell more sharply.

On a month-on-month basis, new home prices fell at a slightly faster pace in May, even as larger cities showed tentative signs of stabilisation.

Weak household loan data released last week suggested that people remain wary of borrowing to buy houses amid sluggish income growth and job insecurity.

The labour market is still under pressure with about 12.7 million graduates leaving schools during the summer, while fears of AI displacement are causing worker anxiety. But the nation-wide survey-based jobless rate eased to 5.1% from April's 5.2%.