China's economy displayed increasing unevenness in May, with retail sales declining for the first time in over three years and investment weakening even as industrial production picked up pace.
Tuesday's official data highlighted a two-speed growth pattern in the world's second-largest economy, with factories buoyed by surprisingly resilient exports but domestic demand weakening amid a multiyear property market downturn.
Retail sales, a key gauge of consumption, slid 0.6% in May, data from the National Bureau of Statistics (NBS) showed, reversing April's 0.2% rise and below the estimated 0.0% in a Reuters poll. It was the first monthly fall since December 2022.
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.
Travelers' spending during the five-day Labour Day holiday in May was lukewarm, and the impact of the government's consumer-goods trade-in scheme is fading. A high base from May last year also contributed to the decline.
At a bar in Shanghai's financial district, manager Jie'ao Feng said his business has taken a hit from shrinking corporate entertainment budgets. He has been offering group deals to draw larger crowds, but this has squeezed margins.
Screening World Cup matches hasn't helped much, he said, because of the late-night and early-morning scheduling of the matches, and he has had fewer customers in June than in May, when his sales saw a boost from the long holiday.
"Consumers are not as impulsive as before," Feng said.
Zhiwei Zhang, chief economist at Pinpoint Asset Management, said that the weak retail sales data places pressure on the government to consider policy measures to stabilize consumption.
"I still expect policy 'fine tuning' will come in July after the second quarter GDP data is released."
By contrast, industrial output rose 4.5% in May from a year earlier, picking up from 4.1% growth in April and beating expectations of a 4.3% increase.
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. China's high-tech manufacturing output rose 15.1% in May.
"Several divides characterized 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.
Services consumption grew 5.4% in January-May, much better than goods sales, and is becoming a growing driver of household consumption, but it also slowed from 5.6% in the first four months.
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 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 the future, with new urbanization, 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-over-month basis, new home prices fell at a slightly faster pace in May, even as larger cities showed tentative signs of stabilization.
Weak household loan data released last week suggested that people remain wary of borrowing to buy homes amid sluggish income growth and job insecurity.
The labor 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 nationwide survey-based jobless rate eased to 5.1% from April's 5.2%.
Economists say strong exports could continue to provide a prop to China's economic growth this year, but its widening trade surplus may cause some disputes.
"The export boom can help to mitigate the weak domestic demand in the short term. But given the size of China's economy, strong export growth will likely lead to tension with trading partners," Zhang from Pinpoint Asset Management said, adding a potential trade conflict with Europe is a risk to watch in the coming months.
