May trade beats expectations, but weak domestic demand hinders inflation transmission

Overview

This research report, issued by Goldman Sachs, briefly outlines three core highlights of China's recent macroeconomic performance. The report points out that although May trade data was strong and exceeded expectations, this was primarily due to a wave of artificial intelligence (AI)-related capital expenditure. Meanwhile, domestic end-user demand remains weak, preventing the rise in the Producer Price Index (PPI) from effectively transmitting to the Consumer Price Index (CPI). Additionally, the report clarifies recent market misunderstandings regarding data center investment policies, noting that related plans are not newly proposed but part of long-term planning.

Core views

The trade sector shows significant acceleration. In May, China's exports grew 19.4% YoY, and imports grew 27.5% YoY, both surpassing general market expectations. The main driver behind this strong growth is the ongoing boom in AI capital expenditure. Specifically, semiconductors and automatic data processing equipment (including data center equipment) together contributed approximately half of the import/export growth in May, indicating high prosperity in the technology hardware sector. There is a clear divergence between upstream and downstream prices. In May, the YoY increase in PPI expanded from 2.8% in April to 3.9%, reflecting a recovery in upstream industrial product prices. However, this upstream price increase did not translate into inflationary pressure on the downstream consumer side; the YoY increase in CPI remained at 1.2% in May, unchanged from the previous month. This blockage in the price transmission mechanism directly points to weak end-user demand. Credit data corroborates this view, showing indeed weak loan demand. Based on these data characteristics, institutions hold a cautious attitude toward the upcoming May economic activity data, expecting both retail sales and fixed asset investment to decline YoY. This indicates that despite strong external demand and investment in specific sectors (such as AI infrastructure), the broad-based foundation for domestic demand is not yet solid. On the policy front, addressing the market attention triggered by Bloomberg's report on "the Chinese government planning to invest 2 trillion yuan in building data centers," the report clarifies that this is not new news. The plan is actually part of the "Six Networks" construction proposed in the "15th Five-Year" Plan in March, which includes water networks, new power grids, computing power networks (including data centers), next-generation communication networks, urban underground pipe networks, and logistics networks. Officials from the National Development and Reform Commission pointed out during the Two Sessions that China's investment in the "Six Networks" could exceed 7 trillion yuan this year (accounting for 5% of GDP), and these areas will be the focus of investment in the coming years.

Analysis framework

The report adopts a typical method of macroeconomic data decomposition and logical verification. First, by comparing the unexpected growth in total imports and exports with the contribution of specific categories (semiconductors, data center equipment), it identifies that the current driver of trade growth is structural rather than comprehensive. Second, using the scissors difference analysis between PPI and CPI, combined with credit data, it verifies the economic reality of "hot upstream, cold downstream," thereby deriving the conclusion of insufficient domestic demand. Finally, by tracing back to policy documents (the "15th Five-Year" Plan), it conducts fact-checking on market rumors to eliminate emotional fluctuations caused by information asymmetry.

Methodology notes

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Price Transmission Mechanism

  The research report judges whether cost pressures can be smoothly passed on to consumers by observing the differences in changes between PPI (upstream ex-factory prices) and CPI (downstream consumer prices). If PPI rises while CPI does not, it usually means insufficient downstream demand, making it difficult for companies to raise prices and squeezing profit margins.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Import/Export Structure Decomposition

  When analyzing trade data, one looks not only at total growth rates but also decomposes growth into specific categories (such as semiconductors and data center equipment) to identify whether the real growth engine is cyclical recovery or a structural trend (such as the AI wave).

Key data

• May Export YoY Growth Rate19.4%Higher than market expectations
• May Import YoY Growth Rate27.5%Higher than market expectations
• May PPI YoY Growth Rate3.9%Further increased from 2.8% in April
• May CPI YoY Growth Rate1.2%Flat compared to April, did not rise with PPI
• Contribution of Semiconductors and Data Center EquipmentApprox. 50%Accounted for half of May's import/export growth
• Estimated Annual Investment for 'Six Networks'Over 7 Trillion YuanAccounts for approx. 5% of GDP, including data center construction

Impact & implications

The research report believes that the current strength in trade has distinct structural characteristics, primarily driven by AI-related capital expenditure rather than a comprehensive economic recovery. Due to blocked price transmission and weak credit demand, domestic consumption and investment still face downward pressure in the short term. Investors should note that market expectations regarding investments in new policies such as data centers may be overinterpreted; the actual policy context has been clarified in long-term plans. The construction of the "Six Networks" will be a confirmed investment theme in the coming years, but its pull on short-term economic data needs to be viewed rationally.

Risks

• Continued weakness in end-user consumer demand leading to retail sales declines exceeding expectations
• Upstream price increases eventually squeezing profits of mid-to-downstream enterprises, affecting overall profitability quality
• Misinterpretation of policy benefits by the market may lead to asset price volatility

What to watch

• May retail sales and fixed asset investment data to be released on June 16
• Trends in household and corporate medium- and long-term loans in subsequent credit data
• Actual implementation progress and fund availability for projects related to the 'Six Networks' construction