China’s May Economic Data Surprise Lifts Markets, But Structural Concerns Linger

Markets are breathing a cautious sigh of relief after China released a wave of better-than-expected economic data for May, signaling some resilience in the world’s second-largest economy despite mounting domestic and global headwinds. The standout figure was retail sales, which rose 6.4% year-over-year—well ahead of the 4.9% forecast in a Reuters poll and the strongest pace since December 2023. The report helped fuel a global equity rebound to start the week, offering a glimmer of consumer-driven growth in an economy otherwise mired in deflation, property market turmoil, and weakening external demand.

Industrial production in May grew by 5.8% year-over-year, modestly below expectations for a 5.9% increase and a deceleration from April’s 6.1% clip. The slowdown in factory output reflects waning export momentum and sluggish manufacturing activity, compounded by continued tensions with the U.S. and persistent softness in the real estate sector. Still, the data was strong enough to spark a bounce in regional equity markets and stabilize sentiment, particularly following last week’s volatile oil and commodity moves tied to geopolitical unrest in the Middle East.

Retail strength appears to have been aided by a mix of government incentives and seasonal consumption drivers. Officials pointed to the “consumer goods trade-in” program—offering subsidies for new home appliances and cars—as a key driver of spending. The earlier-than-usual “618” e-commerce shopping festival also pulled forward demand into May. While this front-loaded activity may depress June's figures, the data nonetheless marks a temporary victory for policymakers focused on boosting domestic demand.

However, structural weaknesses remain unresolved. Property investment contracted 10.7% in the first five months of the year versus the same period last year. New home prices fell 0.2% month-over-month in May, with annualized declines of over 4% continuing to pressure confidence. Fixed-asset investment grew just 3.7% year-to-date through May, missing the consensus estimate of 3.9% and down from 4% in April. The picture is clear: while consumers are showing signs of life, private investment remains restrained—particularly in real estate, which traditionally anchors China’s growth model.

The labor market showed some improvement, with the urban survey-based unemployment rate ticking down to 5.0%—its lowest since November. Yet analysts caution that headline figures may understate the strain on younger workers and service sector employment. Moreover, consumer prices fell 0.1% year-over-year for the fourth consecutive month, while producer prices dropped 3.3%. This sustained deflationary trend underscores a fragile demand backdrop that is unlikely to support long-lasting growth without further stimulus.

Goldman Sachs and other major investment banks expect Beijing to introduce more easing in the second half of 2025 if momentum falters. However, the better-than-expected May figures may delay aggressive action in the near term. Economists at Natixis and Morgan Stanley agree that policymakers are likely to preserve their limited fiscal firepower until growth dips below a 4.5% threshold—an event they view as increasingly probable given property and trade dynamics.

On the global stage, U.S.-China trade tensions remain an unpredictable variable. Despite a mid-May truce that rolled back some of the more extreme tariffs—bringing average bilateral levies from peaks above 100% down to around 55%—structural frictions remain. China’s exports to the U.S. collapsed 34% year-over-year in May, the sharpest drop since early 2020. While trade with Southeast Asia, the EU, and Africa helped cushion the blow, the broader impact of deglobalization and economic bifurcation is palpable.

Washington and Beijing’s recent agreement in London to pause export controls on key technologies and rare-earths was a positive development, restoring relations to the more stable footing seen prior to the April flare-up. Yet the underlying distrust persists. The U.S. continues to threaten further restrictions on jet engine components and AI chips, while China maintains tight control over rare earths vital to Western defense and tech sectors.

The broader takeaway is that China’s economy is stabilizing, but still walking a tightrope. The May data offered a short-term reprieve, particularly on the consumption side, but fragilities in the property market, external trade, and inflation metrics suggest that any sustainable recovery will require a carefully calibrated mix of policy easing and geopolitical de-escalation. For global investors, the data hints at some breathing room—but not resolution. As U.S.-China negotiations continue in the background and domestic pressures mount, markets will remain highly sensitive to the next policy step out of Beijing.