China’s post-pandemic recovery has taken a distinctly lopsided turn. Official data released on Tuesday show retail sales fell 0.6 per cent in May compared with a year earlier, the first contraction since the country abandoned its zero-Covid regime in December 2022. The decline, which missed consensus forecasts of flat growth, was driven by a sharp 16.1 per cent drop in automobile purchases and broad-based weakness in discretionary and durable goods. Meanwhile, industrial output expanded 4.5 per cent year-on-year, accelerating from April’s 4.1 per cent and comfortably exceeding analyst expectations. The divergence exposes a Chinese economy that is increasingly reliant on factory production for momentum even as household spending sputters.

That imbalance is mirrored in the property sector, where the long-running crisis continues to sap consumer confidence. New-home prices across 70 major cities fell 0.2 per cent month-on-month in May, with 52 cities recording declines, and were down 3.6 per cent from a year earlier. Fixed-asset investment contracted 4.1 per cent in the first five months of the year. Viewed from Beijing, the data underscore the challenge of rebalancing growth toward domestic consumption. Yet from Washington and Brussels, the combination of robust industrial output and subdued internal demand reinforces a different narrative: that China is producing far more than its own economy can absorb and is exporting the surplus, distorting global markets.

Western officials have seized on the concept of “overcapacity” to justify new trade barriers, but the evidence is contested. Chinese steel mills, for instance, operated at a capacity utilisation rate of 78.1 per cent in 2024, a level that analysts in Europe note falls within the range the European Union itself considers healthy. American policymakers, however, apply a cruder metric, branding any output that exceeds domestic consumption as overcapacity. This doctrinal gap is now widening into a concrete trade conflict. Having erected tariff walls against Chinese goods, the United States has inadvertently redirected the export torrent toward Europe and emerging Asia, creating what some economists call “China Shock 2.0”. At the recent G7 summit, leaders voiced alarm that surging Chinese exports of electric vehicles, solar panels and steel threaten to hollow out European manufacturing just as the earlier shock devastated the American Rust Belt.

Viewed from London or Frankfurt, the risk is not merely cyclical but structural. If China’s domestic demand remains anaemic, its industrial machine will seek outlets abroad, intensifying protectionist pressures that could fragment the global trading system. Beijing faces a delicate balancing act: stimulating consumption without reigniting property speculation or debt accumulation, while pushing back against tariffs that jeopardise its export-led growth model. The green transition adds another layer of complexity. Chinese overcapacity in solar panels and batteries has slashed global prices, accelerating decarbonisation, but Western capitals argue that subsidised Chinese production threatens their own clean-tech industries. The May data thus encapsulate a broader dilemma: China’s factory floor is humming, but its shop floors are quiet, and the resulting surplus is testing the resilience of an already fraying international economic order.