China: Economic Recovery Driven by External Demand Continues

■ China's production and exports strengthened in May, while consumption and investment weakened further.  

■ Driven by global demand for artificial intelligence (AI), the economic recovery continued, but the need to address weak domestic demand is also increasing. 
 
Yesterday, China released its main economic indicators for May. Industrial value-added (up 4.5% year-on-year) and the service sector production index (up 4.4% year-on-year), reflecting supply conditions, saw faster growth, while total retail sales of consumer goods (down 0.6% year-on-year) and fixed asset investment (excluding rural areas, down 4.1% year-to-date) continued to decline, reflecting demand conditions. Trade data released on the 9th showed that, against the backdrop of growing global AI investment demand, exports, primarily of rare earths and integrated circuits (ICs), increased significantly (up 19.4% year-on-year). Expanding overseas demand in high-tech sectors such as computers, communications, and other electronic equipment supported domestic production. Furthermore, increased global demand for inventory reserves due to rising raw material and transportation costs caused by the conflict in Iran and disruptions to global supply chains also benefited China's production and export activities. However, at the same time, domestic demand weakened further. On a month-on-month basis, both total retail sales of consumer goods (down 0.38%) and fixed asset investment (down 1.91%) have declined for three consecutive months. Consumption and investment have actually been weak since the second half of last year, and the situation has worsened since the outbreak of the conflict in Iran. 
 
Price data released on June 10th also reflected the impact of rising raw material and transportation costs. Primarily in upstream production sectors such as mining and raw materials, the Producer Price Index (PPI, up 3.9% year-on-year) saw a further increase. However, the Consumer Price Index (CPI, up 1.2% year-on-year) remained relatively moderate, indicating that the transmission of costs to final product prices has not yet been fully realized. Given that overall economic demand is lower than total supply and a deflationary gap persists, the supply-and-demand relationship for commodities, except for energy-related items, will continue to suppress price increases, and a moderate inflationary trend is expected to persist. 
 
Looking at the May PMI, data released by private institutions (manufacturing 51.8, services 54.4) were significantly higher than the 50-point threshold separating expansion from contraction, while data released by the government (manufacturing 50.0, services 50.1) hovered around 50. Since state-owned enterprises account for a larger proportion of government statistics, while emerging private enterprises and SMEs account for a larger proportion of private statistics, it can be seen that the expansion of business activities is mainly concentrated in private enterprises. Nationally, the economic climate has continued to improve this year. After achieving a year-on-year growth of 5.0% and a quarter-on-quarter growth of 1.3% in the first quarter, reaching the upper limit of the government's growth target of 4.5%-5.0%, the economic recovery momentum continues. However, this recovery is mainly driven by external demand in specific sectors such as high technology, showing a clear imbalance, while the problem of weak domestic demand has further intensified. In particular, fixed asset investment may further trigger debt risks, and the necessity for policy support in this area is increasing. Against the backdrop of the mutual constraints between economic structural reform and the goal of stabilizing growth, how the Chinese government will coordinate these two aspects and achieve economic stability has become a focus of attention in the future.