China’s consumer spending contracted further in May, with retail sales declining 0.6 percent compared to the same period last year, according to data released by the National Bureau of Statistics. This marks the first year-over-year drop in retail sales since December 2022, when stringent COVID-19 restrictions and a widespread wave of infections dampened consumer activity.

The decline was unexpected, as rising energy costs—particularly higher fuel prices following the closure of the Strait of Hormuz—were anticipated to boost retail figures. Gasoline sales, included in the retail data and unadjusted for inflation, increased but were insufficient to offset broader consumer retrenchment. Adjusted for inflation, the fall in spending would be even more pronounced.

The subdued consumption reflects ongoing fallout from China’s housing market crash, which has led millions of households to cut back on spending amid financial uncertainty. Domestic demand remains muted, even as other segments of the economy show resilience. Industrial output grew in May, supported in part by strong manufacturing of electric vehicles and high-tech products. Exports continued their surge, reaching a record $376.8 billion in May, building on April’s record performance, as firms seek opportunities abroad amid weak local demand.

Investment trends further illustrate the cautious outlook among Chinese businesses. Excluding the severely troubled real estate sector, overall investment contracted in May, with private sector spending particularly weak, signaling limited confidence in profitable expansion opportunities.

China’s trade surplus narrowed in May compared to previous months, largely due to rising oil import costs. The country mitigated some of the impact by reducing crude oil imports. This shift underscores the growing challenges faced by China's economy as it contends with increased global energy prices.

Economists note the widening divide in China’s economic landscape. While supply-side factors such as exports and industrial production remain strong, household consumption struggles. Zhu Tian, an economics professor at the China Europe International Business School in Shanghai, emphasized the divergence between robust supply and weak domestic demand.

The situation is drawing international attention ahead of the Group of Seven (G7) summit in southeastern France, where China’s economic challenges and trade policies are expected to be key discussion points. The European Union is contemplating restrictions on imports of subsidized Chinese goods, while some Western economists argue that China’s currency, the renminbi, continues to be undervalued. Mark Sobel, vice chairman and chief economist at the Official Monetary and Financial Institutions Forum, called for coordinated G7 action, including pushing for significant renminbi appreciation to address what some describe as “China Shock 2.0.”

Vehicle sales, a major component of retail expenditures, plunged 22 percent in May, driven mainly by a steep drop in gasoline-powered car sales amid higher fuel prices. This decline was somewhat offset by rising sales of electric vehicles and plug-in hybrids, which represented five out of every eight cars sold last month. The auto industry anticipates continued softness, with summer traditionally a slow sales period and recovery typically not occurring until the national holidays in late September and early October.

Cui Dongshu, secretary general of the China Passenger Car Association, noted that “weak consumer confidence, combined with the prolonged downturn in the property sector, is likely to keep domestic demand under pressure,” indicating ongoing challenges for China’s broader economic recovery.