CNBC’s The China Connection Newsletter: Expect AI to lift all boats

Hello, I’m Evelyn. I am writing to you from Beijing. Welcome to the latest edition of The China Connection. This is a snapshot of what I’ve seen and heard from local businesses.

As AI increasingly captures the headlines, what does it miss about other parts of the economy?

Since the pandemic, China’s story has diverged as traditional industries declined while technological advances gained traction.

This is now reflected in official economic indicators. Demand for artificial intelligence-related chips is driving exports and some inflation. But the real estate recession is worsening even though consumers are still not spending as much.

As investors await the May retail sales and investment figures to be released at 10am local time on Tuesday, Standard Bank’s Jeremy Stevens asked when the GDP downgrade would begin.

“We do not see a reliable path to 4.6% in Q2 26,” he said in a note Wednesday. “Instead, a 4% threshold test in Q2:26 appears to be a natural destination.”

“The Iran war has significantly hit manufacturing margins, which were already at five-year lows, weakened consumer confidence and strengthened the argument in favor of precautionary cash hoarding,” he said. Mr Stevens also warned of increased export pressure from rising import costs and a potential decline in overseas demand.

China typically reports second-quarter GDP in mid-July, and top leaders evaluate stimulus measures at a meeting later that month.

Economists expect May data to confirm widespread stagnation.

Retail sales rose 0.2% in April, the slowest growth since coronavirus restrictions ended in December 2022, but are expected to slow to 0% year-on-year in May, according to a Reuters poll of economists.

Industrial production is expected to rise to 4.3% in May from 4.1% in April, according to the poll.

Fixed asset investment, reported on a year-to-date basis, is expected to decline by 2% in the first five months of this year. This is a sharper decline than the annual decline of 1.6% as of April, and the drag on real estate investment is 13.7%.

“Real estate remains the biggest reason why we can’t be more bullish on China,” KKR said in its mid-year outlook released last week. The large number of unsold homes means China will take longer than other countries to end its real estate recession, the report said.

KKR expects real estate resistance to shrink from 1 point this year to 0.6 points next year.

According to the report, digitalization will contribute 2.5 percentage points to China’s GDP in 2027. However, it said the contribution of just 0.9 percentage points from retail and tourism would not be enough to prevent overall economic growth from slowing to 4.4% from 4.6% this year.

It’s a tough world for foreign companies.

general mills announced earlier this month that it would sell its Haagen-Dazs stores in mainland China.

Swiss-based sportswear company On pendingcaptures sports trends far better than other brands, and its upcoming store in downtown Beijing will replace the currently closed Nike store. but lululemon Growth in China has not been strong enough to compensate for weakness in North America.

According to statistics from China Autohome, Audi’s new brand targets wealthy young women with prominent Xiaohongshu advertising and the use of Olympic tennis “queen” Zheng Qinwen as the brand’s representative, but sales in China in May were only 900 cars, far behind Tesla.

In fact, Chinese companies are playing a bigger role.

Sportswear and equipment company Lee-Nin has signed a deal with NBA star Stephen Curry to open Curry-branded stores, the company announced earlier this month. General Mills said Haagen-Dazs’ new owners also include China Tea Company.

A rapidly growing story is that Chinese companies and their technology are expanding overseas.

Consumer electronics giant Midea on June 9 announced a new technology solution product that uses AI and automation software to help Chinese companies manage their international factory networks.

“Companies in the technology, manufacturing, metals and transportation sectors have reported strong overseas growth, with profits often above average,” Moody’s said in a report last week.

Back in Beijing, high school students have finished their annual university entrance exams in early June, and the mood has shifted to summer vacation. People are hitting the streets again, just like they did during the pandemic. We may not necessarily be spending a lot of money, but we are enjoying the best air quality in recent years.

“In the summer, I get very active, but in the winter, I get really depressed,” Quan Chao, who works in the film and entertainment industry, told CNBC through a Mandarin interpreter. Recently, he was out until 4 or 5 a.m., he said. “There are lots of fun places nearby.”

Department of Defense expands list of Chinese military-related companies to include Alibaba and Baidu

The US Department of Defense has included a number of Chinese companies on its latest list of entities believed to have supported the Chinese military.

Electric vehicle giant BYD predicts that 80% of China’s car sales will soon be electric vehicles

Despite the recent slowdown in China’s electric vehicle market, BYD Vice President Stella Li told CNBC’s Arjun Karpal that she expects EV adoption to increase thanks to new technologies such as fast charging.

Unfolding dilemma for Chinese startups reveals cracks in Beijing’s technology funding machinery

The series of events surrounding Chinese robotic vacuum cleaner company Dreamy underscores Beijing’s tough balancing act as it seeks to counter U.S. technological dominance. As states pour money into supporting China’s technology ambitions, there aren’t always guardrails or market forces in place to prevent widespread misallocation.

June 16: May retail sales, industrial production and investment data

June 19: Mainland China and Hong Kong stock exchanges closed for public holidays

June 22-26: China International Supply Chain Expo (CISCE) will be held in Beijing