Nomura: China’s Domestic Demand Deteriorated Sharply in May, with Both Retail Sales and Investment Turning Negative
AI summary card
Nomura: China’s Domestic Demand Deteriorated Sharply in May, with Both Retail Sales and Investment Turning Negative
In May, retail sales turned negative year-on-year at -0.6%, and fixed asset investment plunged to -10.7%, while the real estate sector contracted further. Nomura maintains a low Q2 GDP growth forecast of 4.1%, arguing that the AI boom cannot offset the drag from the property sector.
- May retail sales fell 0.6% year-on-year, the first decline since the end of the pandemic lockdowns in late 2022.
- May fixed asset investment dropped 10.7% year-on-year, well below the market’s expectation of -4.2%.
- Real estate development investment declined 24.3% year-on-year, with new home sales down 13.1%.
- Industrial value added rebounded to 4.5% year-on-year, but was significantly affected by disruptions in energy supply.
- Maintains a Q2 GDP growth forecast of 4.1%, below the market consensus of 4.7%.
Report interpretation
Overview
This report provides a detailed analysis of the economic activity data for May 2026 released by China’s National Bureau of Statistics. The key conclusion is that domestic demand continues to weaken. Although industrial production has shown a moderate rebound, retail sales have turned negative, fixed asset investment has plummeted, and the real estate sector has contracted further. Nomura cautions that markets and policymakers should not assume that the AI boom and stock market gains can resolve the economic challenges driven by the collapse of the property market, and maintains a below-consensus GDP growth forecast of 4.1% for the second quarter.
Core views
Comprehensive weakening of domestic demand: In May, retail sales grew -0.6% year-on-year (April: +0.2%), marking the first year-on-year decline since the abrupt reopening after the pandemic in late 2022, and missing the market consensus of -0.2%. While nominal sales of non-automotive goods improved, this was largely driven by rising oil and chip prices; underlying sales may have worsened as scrappage incentive programs wind down. Automobile sales fell 16.1% year-on-year, and dining-out services expanded by just 0.6%, reflecting weak consumer confidence. Investment contracted sharply: In May, fixed asset investment (FAI) plunged to -10.7% year-on-year (April: -8.0%), far worse than the market’s forecast of -4.2%. Manufacturing, infrastructure, and real estate investment all shrank. Infrastructure investment fell 10.8% year-on-year; Nomura attributes this not to a lack of funds, but to bottlenecks in project approval or execution caused by slow withdrawal of fiscal deposits. Real estate investment dropped 24.3% year-on-year, with new construction starts down 24.6%, underscoring the persistent pressure on the property sector. Industrial production disrupted by supply shocks: In May, industrial value added (IP) rebounded to 4.5% year-on-year (April: 4.1%), in line with expectations but well below the 6.1% recorded in Q1 2026. This rebound was partly supported by export price effects, but internal dynamics were highly uneven. Affected by disruptions in Middle Eastern energy supplies, crude oil processing volume fell 9.1% year-on-year, and output of chemical products such as sulfuric acid and ethylene declined. Meanwhile, under the “anti-involution” policy, solar panel production fell 20.4% year-on-year, and automobile output dropped 3.2%. Only integrated circuits benefited from AI demand, with output up 22.9% year-on-year.
Analysis framework
Nomura employs a combined approach of macroeconomic data disaggregation and a supply-demand framework. First, it assesses the degree of surprise in economic performance by comparing actual data with market consensus and its own forecasts (e.g., the sharp miss in FAI). Second, it conducts quantity-price decomposition to distinguish between price-driven nominal growth (e.g., higher CPI, PPI, or commodity prices boosting nominal retail sales) and changes in actual volumes, thereby revealing the true state of demand. Third, it delves into upstream segments of the industrial chain to analyze how energy supply shocks (e.g., a nine-year low in oil imports) and downstream manufacturing constraints propagate through intermediate chemical production. Finally, it contextualizes the data within broader policy frameworks (e.g., the “anti-involution” campaign, the pace of fiscal spending) to explain structural factors behind the numbers rather than focusing solely on headline aggregates.
Methodology notes
Quantity-Price Decomposition Analysis
When analyzing retail sales and industrial output, nominal growth rates are broken down into price components (e.g., CPI, PPI, specific commodity prices) and volume components. For example, the report notes that the narrowing decline in petroleum product retail sales was primarily due to a 25.6% increase in prices, while actual consumption may have plummeted by 30%, providing a more accurate assessment of underlying demand conditions.
Supply-Demand Framework Analysis
The report focuses not only on the demand side (retail, investment) but also on supply-side constraints affecting production. For instance, it points to geopolitical disruptions in the Middle East leading to reduced energy supplies (declining oil imports) and domestic “anti-involution” policies limiting capacity, both contributing to structural divergence in industrial output and negative growth in certain sectors.
Business Cycle Turning Points and Sustainability Assessment
By comparing Q1 data with April-May figures, the report determines whether the Q1 economic rebound was temporary. It concludes that the weak April-May data supports the view that the Q1 bounce was fleeting, adjusting its outlook for subsequent quarters accordingly and emphasizing the persistence of weak domestic demand.
Key data
- May Retail Sales YoY-0.6%First year-on-year decline since late 2022; prior reading: +0.2%
- May Fixed Asset Investment YoY-10.7%Far below the market’s -4.2% estimate; prior reading: -8.0%
- May Industrial Value Added YoY4.5%Moderate rebound; prior reading: 4.1%; below Q1’s 6.1%
- May Real Estate Development Investment YoY-24.3%Contraction has deepened; prior reading: -20.1%
- May New Home Sales Area YoY-13.1%Sales continue to decline; prior reading: -9.5%
- May Crude Oil Processing Volume YoY-9.1%Affected by energy supply disruptions; prior reading: -5.8%
- Q2 GDP Growth Forecast4.1%Nomura’s prediction, below the market consensus of 4.7%
Impact & implications
The report argues that weak economic data suggests Beijing will not allow the renminbi to appreciate too rapidly; recent moves to permit banks to raise interest rates on corporate USD deposits to slow FX conversions corroborate this view. At the policy level, it advises the government to maintain high fiscal spending to address extremely weak domestic demand, particularly addressing delays in disbursing funds for infrastructure projects. For the market, the AI-driven boom is concentrated mainly in a few “smart” cities (such as Tier-1 metropolises), making it unlikely to spur a broad recovery in the national real estate market. Investors should remain vigilant about the risks posed by the drag of the property sector on the overall economy.
Risks
- Continued weakness in domestic consumer demand and declining purchasing power among residents.
- Deeper-than-expected contraction in the real estate market, weighing on overall investment.
- Prolonged disruptions in energy and raw material supplies, impacting industrial production.
- Inefficiencies in the implementation of fiscal policy, resulting in delayed conversion of funds into tangible outcomes.
What to watch
- The pace of fiscal deposit withdrawals and improvements in infrastructure investment in the coming months.
- Diverging trends in housing prices between Tier-1 cities and other regions.
- Progress in restoring energy supplies and their impact on the chemical and manufacturing sectors.
- Policy adjustments regarding the “anti-involution” measures and capacity constraints.