China's May exports slow, deflation deepens as tariffs bite

China's export growth slowed to 4.8% in May, a three-month low, with exports to the U.S. plummeting 34.5% year-on-year due to the impact of U.S. tariffs, while imports also declined 3.4%. Factory-gate deflation deepened to -3.3%, the worst in two years, increasing pressure on China's economy. Despite stimulus measures, domestic demand remains fragile, and markets showed muted reaction to the data, as trade tensions and deflationary pressures weigh on economic recovery.

Analysis

China's economy is exhibiting significant headwinds on both external and domestic fronts, as evidenced by May's economic data. Export growth decelerated to a three-month low of 4.8% year-on-year, a notable slowdown from April's 8.1% and missing the 5.0% consensus forecast, largely driven by the impact of U.S. tariffs which saw shipments to the U.S. plunge by 34.5% year-on-year. Concurrently, imports contracted by 3.4% year-on-year, a sharper decline than the 0.2% seen in April and worse than the 0.9% expected, underscoring persistent fragility in domestic demand despite a rise in the trade surplus to $103.22 billion. Deflationary pressures are intensifying, with the producer price index (PPI) falling 3.3% year-on-year, its steepest contraction in 22 months, while consumer prices also declined by 0.1%. Although core inflation edged up to 0.6%, economists view this improvement as fragile, highlighting persistent overcapacity as a driver for continued deflation. These indicators, including slowed retail sales growth and specific instances like Starbucks (SBUX.O) lowering prices, point to a challenging environment for China's post-pandemic recovery, compounded by ongoing U.S.-China trade tensions and tightened export controls which impacted rare earth and electric machinery exports. Despite monetary stimulus measures from Beijing, the muted market reactions, with the CSI300 Index and Shanghai Composite Index up around 0.2%, suggest investors remain cautious about the economic outlook.

Key Decisions for Investors

• Investors should consider adopting a more cautious stance towards China-exposed assets, given the slowdown in May's export growth to 4.8%, a 34.5% year-on-year plunge in exports to the U.S., and deepening factory-gate deflation at -3.3%.
• Continuously monitor the progression of U.S.-China trade talks and Chinese export control measures, as these factors are critical determinants for the outlook of export-oriented industries and overall market sentiment.
• Re-evaluate positions in sectors reliant on Chinese domestic demand or sensitive to deflationary pressures, as weak import figures (-3.4% year-on-year) and declining consumer prices (-0.1% year-on-year) signal persistent economic fragility despite government stimulus efforts.