China’s factory output perks up but consumers stay cautious

China's factories stepped up production for a second straight month in May, as the country shook off the economic torpor of the coronavirus, although the weaker-than-expected gain suggested the recovery remained fragile.

Patchy data on Monday also showed sustained contractions in retail sales and investment, a sign many sectors were still struggling with the effects of heavy shutdowns across the world's second-largest economy earlier this year.

Global leaders are closely watching China to see how long it takes to get back on its feet as they begin to relax their own stringent anti-virus measures and reboot their economies.

Analysts say signs of improvement continue to be seen in China ranging from steel production and car sales to more lights being turned on in industrial parks. However, they warn it could take many months for broader activity to return to pre-crisis levels.

"Industrial production is on the whole getting better, but there are still quite a few difficulties and uncertainties," said Jiang Yuan, an official at the National Bureau of Statistics in a statement.

Industrial output growth quickened to 4.4 per cent in May from a year earlier, the highest reading since December, official data showed on Monday. Analysts polled by Reuters had expected a 5.0 per cent rise from 3.9 per cent in April, the first expansion since the virus emerged in China late last year.

But a collapse in export orders amid global lockdowns has left factories more reliant on domestic demand, which is recovering at a more sluggish pace. Retail sales fell for a fourth straight month. While the 2.8 per cent drop was smaller than the 7.5 per cent slump in April, it was larger than the 2.0 per cent fall tipped by analysts. Heavy job losses and fears of a second wave of infections have kept consumers cautious.

"There are still restrictions in some demand areas, people remain worried and not many are traveling or going to cinemas, plus there are some virus flare-ups, which will have some impact on consumption," said Tang Jianwei, senior economist at Bank of Communications in Shanghai.

Fixed asset investment fell 6.3 per cent in January-May from the same period last year, compared with a forecast 5.9 per cent fall and a 10.3 per cent decline in the first four months of the year. As in past downturns, Beijing is banking on higher infrastructure spending to lead a recovery, and steel mills have cranked up furnaces to over 92 per cent of capacity.

Private sector fixed-asset investment, which accounts for 60 per cent of total investment, fell 9.6 per cent in January-May, compared with a 13.3 per cent decline in the first four months of the year.

Other data showed real estate investment fell 0.3 per cent in January-May from a year earlier, far less than in previous months.

 China's gross domestic product shrank 6.8 per cent in the first quarter, the first contraction on record. Highlighting the uncertain outlook, the government did not set a GDP growth target at its annual parliament gathering in May, the first time in nearly two decades it has not done so.

Some analysts saw May's factory data pointing to a more optimistic outlook than previously feared. Bank of Communications' Tang now expects China's GDP to return to modest growth in the second quarter, helped by the recovery in property investment.