China’s major economic data missed expectations in May. Industrial production (IP) expanded +8.8% y/y in May, worse than consensus of +9.2% and April’s +9.8%. Retail sales growth decelerated to +12.4% y/y, from +17.7% in April. The market had anticipated a +14% growth. Fixed asset investment (FAI) gained +15.4% y/y in the first 5 months of the year, compared with consensus of +17%. FAI expanded +19.9% in the first 4 months. For May alone, FAI expanded +5.6% y/y, markedly weaker than April’s +10.8%.

As the outbreak of the coronavirus began in Wuhan, China early last year, production in automobile was severely affected. This time around, the resurgence of the pandemic in Guangdong province, an area which specializes in electronic manufacturing, last month resulted in chip shortage. This in turn again caused automobile production to contract by -4% y/y. Indeed, this is the key reason for the disappointing IP data in May.

The sharp slowdown in retail sales growth was also driven by car sales, of which growth eased to +6.3% in May, after a +16.1% increase in April. Concerning other categories, catering sales rose +26.6% y/y, down from +46.4% in April. Online goods sales growth decelerated to +9.7% y/y from April’s +15.7%. The Golden Week holiday did boost household spending in certain items. For instance, jewellery sales jumped +31.5% y/y.

Similarly, the slower growth in FAI was driven by -3.7% y/y contraction of in automobiles investment. Investments in other areas remained esilient. For instance, investment in transportation equipment and computers expanded +34.2% y/y and +27.6% y/y, respectively.

We expect economic activities to moderate further in June as pandemic-related restrictive measures in Guangdong remain in place likely weighed on activity growth temporarily in June. Economic recovery could resume in the second half of the year, dependent on the spread of virus, speed of virus mutation and vaccination progress in China, and other places in the world.