China’s economy displayed growing signs of imbalance in May, with weakening consumer spending and a deepening investment slump contrasting sharply with resilient factory activity driven by exports and the global artificial intelligence boom.
Fresh data from China’s National Bureau of Statistics (NBS), first published by Reuters, showed the world’s second-largest economy is increasingly reliant on manufacturing and overseas demand to sustain growth, while domestic consumption and the property sector remain under significant pressure.
The figures are likely to reinforce calls for Beijing to roll out additional stimulus measures in the second half of the year as policymakers grapple with an economy that is expanding unevenly and becoming more dependent on exports at a time of rising trade tensions.
The clearest sign of strain came from retail sales, a key measure of household consumption, which unexpectedly fell 0.6% in May from the previous year. The decline reversed April’s 0.2% increase and marked the first contraction since December 2022, underscoring the fragility of China’s consumer recovery despite repeated government efforts to boost spending.
The disappointing performance indicates that households remain cautious about spending amid concerns over employment prospects, stagnant incomes, and falling property values.
Evidence of that caution was visible across multiple sectors. China’s auto market, often viewed as a barometer of consumer confidence, recorded its eighth consecutive month of declining domestic sales, extending one of the longest downturns in recent years.
The government’s consumer goods trade-in programme, which had helped support spending earlier in the year, appears to be losing momentum. Meanwhile, spending during the five-day Labour Day holiday failed to deliver the strong boost many economists had hoped for.
At a bar in Shanghai’s financial district, manager Jie’ao Feng said weaker corporate spending has significantly affected business.
“Consumers are not as impulsive as before,” Feng said, noting that companies have reduced entertainment budgets and that promotional discounts designed to attract customers have squeezed profit margins.
Even the World Cup, traditionally a major driver of hospitality spending, has provided only limited support because many matches are being played during late-night or early-morning hours in China.
Factories Keep Expanding Thanks To Exports And AI Demand
While consumers are retrenching, China’s industrial sector continues to benefit from strong external demand. Industrial output rose 4.5% in May from a year earlier, accelerating from April’s 4.1% growth and exceeding analyst expectations.
A significant driver has been the surging global investment in artificial intelligence infrastructure. Demand for AI-related technologies has boosted production across China’s high-tech manufacturing sector, which expanded by an impressive 15.1% in May.
The trend reflects China’s growing role in supplying components, equipment, and manufacturing capacity for the global AI buildout, even as the country faces restrictions on access to some advanced Western technologies.
Xu Tianchen, senior economist at the Economist Intelligence Unit, said multiple divisions increasingly characterize the economy.
“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,” he said.
The contrast is another piece of evidence that China’s growth model is shifting. Traditional sectors linked to property and consumer goods remain weak, while advanced manufacturing tied to AI, semiconductors, and technology exports continues to outperform.
Property Crisis Remains A Major Drag
Perhaps the most troubling data came from investment and real estate. Fixed-asset investment fell 4.1% during the first five months of 2026, a sharp deterioration from the 1.6% decline recorded during January-April and significantly worse than economists had expected.
The property sector remains at the center of the weakness. Property investment plunged 16.2% in the January-May period, worsening from a 13.7% decline in the first four months of the year. Home sales, new construction activity, and housing starts also deteriorated further.
The continued downturn illustrates the difficulty Beijing faces in stabilizing a property market that once accounted for nearly a quarter of economic activity when related industries are included. Even though some major cities have shown tentative signs of stabilization, nationwide housing demand remains subdued.
Recent lending data revealed households are still reluctant to take on mortgages, underlining concerns about income growth, employment prospects, and future property prices.
Labor Market Pressures Persist
Officially, China’s urban unemployment rate edged down to 5.1% in May from 5.2% in April. However, economists caution that labor market pressures remain substantial beneath the headline figure. China faces the challenge of absorbing roughly 12.7 million graduates entering the workforce this summer, one of the largest cohorts in its history. At the same time, concerns are growing about the impact of artificial intelligence on employment, particularly in white-collar occupations.
While AI is boosting manufacturing output and technology investment, it is also contributing to uncertainty among workers worried about future job displacement.
Despite the weak domestic picture, economists generally believe Beijing remains on track to achieve its annual growth target of around 5%, largely because exports continue to outperform expectations. Zhiwei Zhang, chief economist at Pinpoint Asset Management, said the disappointing retail sales data increases pressure on policymakers to support consumption.
“I still expect policy ‘fine tuning’ will come in July after second quarter GDP data is released,” he said.
Xu also believes China can still meet its growth objective.
“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.”
The problem for Beijing is that relying increasingly on exports to compensate for weak domestic demand carries its own risks. China’s growing trade surplus is already attracting scrutiny from major trading partners, particularly in Europe and North America, where policymakers argue Chinese manufacturers are flooding global markets with excess capacity.
“The export boom can help to mitigate the weak domestic demand in the short term,” Zhang said.
“But given the size of China’s economy, strong export growth will likely lead to tension with trading partners.”
That dynamic creates a difficult balancing act for Chinese policymakers. While exports and AI-driven manufacturing are helping sustain growth, they cannot fully replace consumer spending and property investment as long-term economic engines.
The May data suggest that China’s economy is becoming increasingly dependent on a narrow group of growth drivers. Unless domestic demand begins to recover more convincingly, analysts believe that Beijing may be forced to introduce additional stimulus measures later this year to prevent the widening gap between a booming factory sector and a struggling consumer economy from becoming a more serious threat to growth.
