Introduction: China’s Consumption Rebounds Amid Policy Push

China’s economic narrative took a surprising positive turn in May 2025 as retail sales grew at the fastest pace since December 2023, thanks to targeted government subsidies and promotional campaigns. Official data released by the National Bureau of Statistics (NBS) showed retail sales jumping 6.4% year-on-year, sharply beating expectations and offering hope for a sustained recovery in domestic consumption. However, this upbeat data is tempered by ongoing challenges in the industrial, investment, and property sectors—reminding investors that China’s recovery remains fragile and uneven.

Retail Sales Jump: Best Performance Since December 2023

Retail sales in May increased by 6.4% compared to a year earlier, well above analysts’ forecasts for a 5% rise and a significant acceleration from April’s 5.1% growth. The boost was driven by a combination of government subsidies—particularly through “consumption vouchers”—and increased online shopping activity ahead of the major “618” e-commerce festival. The city of Shanghai, for instance, saw long lines outside jewelry stores as local governments distributed vouchers to stimulate spending.

Officials credited the improvement to ongoing trade-in programs for consumer goods, an influx of foreign tourists (after China expanded its visa-free entry list), and robust online shopping. The spike in consumption comes as a welcome relief for policymakers battling the dual challenges of deflation and sluggish domestic demand.

Macroeconomic Context: Strong Consumption, Weak Industry and Investment

Despite the strong retail data, other parts of China’s economy showed signs of weakness in May:

Industrial output grew 5.8% year-on-year, slightly below the expected 5.9% and slower than April’s 6.1%.

Fixed-asset investment (YTD) rose just 3.7%, below forecasts and down from 4% in the first four months of the year.

Property investment saw an even deeper contraction, falling 10.7% in the first five months of 2025—a persistent drag on overall investment growth.

Unemployment, measured by the urban survey-based rate, improved to 5.0% (the lowest since November 2024), reflecting some resilience in the labor market even as the property sector remains under pressure.

Real Estate Slump Casts a Shadow

A key area of concern remains the ongoing slump in China’s property market. Prices of new homes in top-tier (Tier 1) cities fell 1.7% year-on-year in May, while declines were even sharper in Tier 2 and Tier 3 cities (down 3.5% and 4.9%, respectively). The NBS acknowledged the need for “more work” to stabilize the real estate sector, as falling property prices can erode household wealth, dampen consumer confidence, and weigh on broader economic growth.

Export and Trade Dynamics: Mixed Signals

China’s external sector sent mixed signals in May. While exports grew less than expected, shipments to Southeast Asia, the EU, and Africa helped offset a sharp 34% year-over-year plunge in exports to the United States. This decline—its steepest since early 2020—reflects the impact of ongoing tariffs and trade friction with Washington, although a temporary 90-day tariff truce agreed upon in mid-May has provided some relief.

Goldman Sachs noted that China’s overall export resilience is partly due to its ability to diversify markets and frontload shipments ahead of tariff deadlines, but cautioned that U.S. tariffs remain at historically high levels (55% on most goods) and could weigh on future export growth.

Deflation Concerns: Consumer and Producer Prices Still Weak

Despite the strong headline retail data, underlying price pressures remain soft:

Consumer prices fell 0.1% in May (year-on-year), marking the fourth straight monthly decline.

Producer prices (factory-gate prices) dropped 3.3% from a year earlier, deepening deflation in the industrial sector.

Persistent deflation is a headache for policymakers, as it discourages spending and investment. While the May retail surge is a welcome sign, it may prove short-lived if underlying price trends do not improve.

Policy Measures and Outlook: Can Beijing Sustain the Recovery?

Beijing’s recent success in boosting consumption has relied heavily on targeted subsidies and local promotional programs. However, several cities have already paused their consumer goods trade-in initiatives due to exhausted funding, and additional central government subsidies have yet to arrive. Economists warn that, absent further demand-side stimulus, the retail recovery could fade once the current round of government support winds down.

JP Morgan and other analysts argue that further efforts to boost consumption should focus on services—such as travel, dining, and healthcare—rather than just goods. They caution that dining curbs on officials, the wind-down of the “618” festival, and the temporary nature of subsidies could all weigh on spending in the second half of the year.

Goldman Sachs suggests that Beijing may wait until economic growth shows clear signs of slowing before rolling out additional stimulus, possibly by expanding the annual fiscal quota for subsidies later in the year. Morgan Stanley’s chief China economist, Robin Xing, predicts that fiscal support will only be ramped up if growth drops below 4.5%.

Risks and Challenges: Will Momentum Last?

Despite the optimism from May’s retail data, multiple risks persist:

The deepening property downturn threatens household confidence and spending.

High U.S. tariffs and global trade tensions limit the upside for export growth.

Deflationary pressures in both consumer and producer prices may persist if underlying demand remains weak.

Fiscal stimulus is likely to remain cautious and targeted rather than broad-based, limiting the scope of recovery.

Analysts such as Jianwei Xu at Natixis emphasize that unless further demand-side stimulus is implemented, the recovery in retail sales could prove temporary.

Conclusion: Fragile Recovery Amid Structural Challenges

China’s stronger-than-expected retail sales growth in May 2025 highlights the power of targeted stimulus and policy support. Yet the uneven performance across sectors—especially the continued property market slump and weak price dynamics—means that Beijing’s policymakers must remain vigilant. The next few months will be critical in determining whether consumer momentum can be sustained or whether new stimulus will be needed to keep the world’s second-largest economy on track.