A significant real estate development is underway in Yantai City, located in Shandong Province, China, with construction ongoing as of May 29, 2026.
As artificial intelligence continues to dominate discussions, there's a growing concern about the implications for broader economic trends.
Greetings from Beijing, I'm Evelyn, and this is the current edition of The China Connection, where I share insights from local business activities and observations.
Since the onset of the pandemic, China's economic narrative has evolved, with technological advancements drawing considerable focus, while conventional industries appear to be declining.
This shift is reflected in official economic statistics. The rising demand for AI-driven chips is propelling exports and contributing to inflation, yet the real estate downturn is deepening, with consumer spending remaining sluggish.
With investors keenly anticipating the release of retail sales and investment data for May—set to be published at 10 a.m. local time on Tuesday—Standard Bank's Jeremy Stevens raises concerns about impending GDP revisions.
"In our view, reaching a 4.6% GDP growth in Q2:26 appears implausible," he noted in a statement on Wednesday. "A more realistic outcome would likely see growth test the 4% benchmark in the same quarter."
He further pointed out that the ongoing conflict in Iran has severely impacted manufacturing profit margins, which are already at their lowest in five years, eroding consumer confidence and boosting arguments for holding onto cash as a precaution. Additionally, Stevens warned of increasing pressure on exports due to rising import expenses and possible declining overseas demand.
China typically releases its second-quarter GDP figures in mid-July, followed by a meeting among top leaders to evaluate potential stimulus measures later that month.
Forecasters predict that the May data will likely confirm a state of widespread stagnation. Retail sales managed only a meager increase of 0.2% in April—the slowest growth since the lifting of Covid restrictions in December 2022—and are projected to stagnate completely in May compared to the same month last year, according to a Reuters survey of economists.
Industrial output for May is expected to rise slightly to 4.3%, up from April's 4.1%, as indicated by the survey.
Looking at fixed-asset investment on a year-to-date basis, a 2% decrease is anticipated for the first four months of the year, a sharp decline compared to the 1.6% dip recorded as of April, largely attributed to a staggering 13.7% drop in real estate investments.
"Real estate remains the primary reason we are not more optimistic about China's economic outlook," stated KKR in their mid-year report released last week. The considerable number of unsold homes suggests that China may take longer than other nations to recover from the current property downturn.
KKR projects that the negative impact from real estate is likely to shrink to 0.6 percentage points in the upcoming year, down from 1 percentage point this year.
The report also predicts that by 2027, digitalization will contribute 2.5 percentage points to China's GDP. However, the anticipated combined contribution of just 0.9 points from retail and tourism will not be sufficient to avert an overall slowdown in economic growth, which is expected to decrease to 4.4%, compared to 4.6% in the current year.
