Nomura: China's May activity data remained weak, with domestic demand and real estate still the main drags
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Nomura: China's May activity data remained weak, with domestic demand and real estate still the main drags
Nomura believes China's May retail, investment, and real estate data generally weakened, while the rebound in industrial production was limited, indicating that the Q1 growth rebound is unlikely to continue and that policy still needs to maintain strong fiscal support.
- May retail sales growth fell to -0.6% YoY, the first negative reading since the post-COVID reopening at the end of 2022, and weaker than market expectations.
- May fixed asset investment growth dropped to -10.7% YoY, worsening further from -8.0% in April and coming in well below both market and Nomura forecasts.
- Industrial production growth edged up to 4.5% YoY, but the average growth rate for April-May remained well below Q1 2026 and 2025 levels.
- Real estate investment, sales, and home price indicators continued to weaken, and the report believes a broad nationwide recovery in the property market remains difficult to achieve.
- Nomura maintains its below-consensus Q2 2026 GDP growth forecast of 4.1% and believes the weak economy will limit excessively rapid appreciation of the RMB.
Report interpretation
Overview
This report is Nomura's commentary on China's May macro activity data. It notes that domestic demand continued to deteriorate in May, with retail sales growth turning negative and fixed asset investment slipping further into deep negative territory; although industrial production rebounded mildly, it remained below its previous trend. Nomura argues that markets and policymakers should not assume that the AI boom and rising stock indices can automatically repair the economic stress driven by the real estate downturn.
Core views
The core views are: first, May activity data confirmed exceptionally weak domestic demand, suggesting the Q1 growth rebound may have been only temporary; second, real estate remains the main drag on the economy, with investment, sales, starts, completions, and home price data all showing continued pressure; third, industrial production was affected by energy and oil-product-related supply shocks, shortages of chemical raw materials, and supply constraints in some industries, limiting the quality of the rebound; fourth, Beijing still needs to maintain strong fiscal spending, and the weak economy will restrain excessively rapid RMB appreciation.
Analysis framework
The report adopts a macro high-frequency and subcomponent breakdown approach, comparing the National Bureau of Statistics' May data on industrial production, fixed asset investment, retail sales, and real estate with market consensus, Nomura forecasts, prior-month data, and historical ranges, and further decomposes them into segments including manufacturing, infrastructure, real estate, autos, petroleum products, electronics, chemicals, steel, cement, photovoltaics, and home prices by city tier.
Methodology notes
Treating industrial production, fixed asset investment, retail sales, and real estate as the core indicators for measuring real-economy momentum.
The report assesses whether China's economic momentum improved in May through YoY, MoM, seasonally adjusted MoM, deviations from market expectations, and sector breakdowns.
Distinguishing between demand-side weakness, policy-driven supply constraints, and energy/raw-material supply shocks.
The report argues that retail sales, investment, and real estate reflect insufficient demand, while oil products, photovoltaics, and some manufacturing data are also affected by prices, raw materials, and anti-involution policies.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- China macro assetsThe report directly analyzes China's May macro activity data and is directly relevant to China's growth expectations and policy outlook.
- Strengths
- Industrial production remains in positive growth territory, AI-related integrated circuit output continues to post high growth, and existing home prices in first-tier cities are still rising.
- Weaknesses
- Retail sales, fixed asset investment, real estate, and some manufacturing data all point to weak domestic demand.
- Comparison
- May data were generally weaker than April or below market expectations, especially fixed asset investment and real estate investment.
- Risks
- Growth slowdown, continued real estate pressure, slow fiscal fund disbursement, and weak consumer confidence.
- RMBThe report believes the weak economy will limit Beijing's willingness to allow excessively rapid RMB appreciation.
- Strengths
- Policy can manage the pace of FX conversion through tools such as bank USD deposit rates.
- Weaknesses
- Weak domestic demand and growth momentum undermine the basis for rapid currency appreciation.
- Comparison
- Compared with the stock market, which is being supported by the AI boom, the exchange rate is more constrained by weak fundamentals.
- Risks
- If growth data continue to undershoot expectations, the RMB's appreciation potential may be further limited.
- Property chainReal estate remains the main macro drag identified by the report.
- Strengths
- Existing home prices in first-tier cities still posted MoM gains.
- Weaknesses
- Nationwide real estate investment, new home sales, housing starts, completions, funding sources, and home prices in most cities remain weak.
- Comparison
- First-tier cities are clearly outperforming lower-tier cities, but a broad nationwide recovery remains difficult.
- Risks
- Population outflows, pessimistic expectations, and inventory pressure in smaller cities may prolong the property slump.
- Energy and chemicals-related sectorsThe report views oil-product-related supply shocks as one of the key factors disrupting industrial production.
- Strengths
- Some price effects are supporting export delivery values and nominal retail sales growth of petroleum products.
- Weaknesses
- Growth in crude processing, sulfuric acid, ethylene, chemical fibers, chemical raw materials, and oil and gas extraction is all under pressure.
- Comparison
- In May, multiple indicators in the oil products and chemicals chain continued to decline versus March and April.
- Risks
- Slow recovery in Middle East energy supply, shortages of oil-product raw materials, and price shocks may continue to disrupt production.
Key data
- May retail sales YoY-0.6%Turned negative from 0.2% in April, below the market consensus of -0.2%, and close to Nomura's forecast of -1.0%.
- May fixed asset investment YoY-10.7%Declined further from -8.0% in April, significantly weaker than the market consensus of -4.2% and Nomura's forecast of -4.9%.
- May industrial production YoY4.5%Rose slightly from 4.1% in April, close to the market consensus of 4.4%, but below Q1 2026's 6.1% and 2025's 5.9%.
- Q2 2026 GDP forecast4.1%Nomura maintains a forecast below the market consensus of 4.7%.
- May real estate investment YoY-24.3%Worsened further from -20.1% in April and came in below the market consensus of -15.0%.
- May new home sales YoYarea -13.1%, value -9.5%Both continued to weaken from April's -9.5% and -7.7%, respectively.
- May infrastructure investment YoY-10.8%Fell sharply from -3.7% in April; the report suggests this may reflect bottlenecks in special bond fund disbursement or project execution.
- May auto retail sales YoY-16.1%On a value basis, this worsened further from -15.3% in April; passenger vehicle sales volume was -22.1% YoY.
- May crude oil imports7.8mbpdThe lowest in nine years and about 30% below pre-war levels; the report believes oil-product-related supply shocks continue to affect industrial production.
- May RMB viewshould not appreciate too quicklyThe report believes the weak economy will limit Beijing's room to allow rapid RMB appreciation.
Impact & implications
In investment terms, the report signals weak macro growth momentum in China, a continued need for policy support, and pressure on property-related and domestic-demand-linked assets. AI-related investment and resilience in first-tier city home prices may provide localized support, but are unlikely to offset the nationwide real estate downturn, weak consumer confidence, and contraction in fixed asset investment. In foreign exchange, the weak economic backdrop may restrain the pace of RMB appreciation.
Risks
- The real estate downturn deepens further and drags on household confidence and investment.
- Fiscal spending or special bond fund disbursement is not timely, causing weakness in infrastructure investment to persist.
- Ongoing supply shocks in oil products and chemical raw materials suppress industrial production-related sectors.
- Anti-involution policies continue to constrain manufacturing investment and capacity expansion in some sectors.
- The payback effect after the scaling-back of consumer goods trade-in subsidies continues to weigh on retail sales.
- If the market relies too heavily on the AI boom and stock market gains to improve expectations, it may underestimate pressure in the real economy.
What to watch
- Whether retail sales in June and Q3 continue to remain in negative or low-growth territory.
- Whether fixed asset investment, especially infrastructure investment, stabilizes as fiscal fund disbursement improves.
- Whether real estate investment, new home sales, home prices, and funding sources show meaningful improvement.
- Output changes in industrial production across oil products, chemicals, electronics, autos, and the photovoltaic chain.
- The intensity of Beijing's fiscal spending, the pace of special bond fund usage, and project approval timing.
- RMB exchange rate policy and FX management signals such as bank USD deposit rates.