China's factories are busy and exports are booming. But ordinary Chinese consumers are not spending, and the latest figures suggest the situation is worsening rather than improving.
New data showed retail sales fell in May for the first time in more than three years. Sales dropped 0.6 per cent compared with the same month last year, reversing a small gain in April and performing worse than almost anyone had predicted. The last time China recorded a similar decline was in December 2022, when the country was still grappling with the final stages of its Covid lockdowns.
What did people stop buying? Mostly larger, more expensive items.
Car sales fell by more than 16 per cent. Home appliances and electronics dropped nearly 16 per cent, while sales of building materials were down almost 14 per cent. Jewellery sales fell by nearly 9 per cent and furniture sales dropped by a similar amount.
These are the kinds of purchases people make when they feel confident about their finances - a new sofa, a new car or a new television. Right now, millions of Chinese households clearly do not feel that way.
By contrast, consumers continued buying the basics. Food and drink sales held up, medicines sold well and spending on everyday clothing remained steady.
People are buying what they need. They are just not buying what they want.
There are several reasons for the slowdown, and many are interconnected.
China's housing market has been struggling for several years. House prices continued to fall in May, while investment in property dropped by more than 16 per cent compared with a year earlier.
When the value of your home falls, it is natural to feel less wealthy and more cautious about spending. That sentiment has been building for some time and shows little sign of fading quickly.
At the same time, a government scheme offering subsidies for consumers to trade in old appliances and cars for new ones appears to be losing momentum. Authorities said the fading impact of the programme contributed to weaker spending, alongside heavy rainfall in parts of the country during May.
Most economists, however, view those factors as only part of the story.
The challenge for China's government is that other parts of the economy are performing relatively well.
Factory output was 4.5 per cent higher than a year earlier, while exports surged by nearly 20 per cent in May.
China is producing more goods and selling more to the rest of the world than ever. The problem is that much of that success is not reaching households in a way that makes consumers feel confident enough to spend.
Beijing has spent much of the past two years trying to encourage stronger consumer spending. It has introduced subsidies, cut interest rates and urged banks to increase lending.
So far, however, the results have been modest, offering only limited encouragement for policymakers hoping domestic demand will drive the next stage of China's economic recovery.
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