China: Growth moderates; fiscal support in the pipeline
Real GDP growth moderated from 5.0% yoy in Q1 to 4.3% in Q2. .
Group Research - Econs15 Jul 2026
  • External trade momentum remained strong, driven by surge in high-tech export demand.
  • Industrial activity was resilient, supported by robust export-related production.
  • Domestic demand was weak across consumption, investment, and credit.
  • Market implication: We expect no cuts to the 1Y LPR; fiscal expansion will be the main policy lever.
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Real GDP growth moderated from 5.0% yoy in Q1 to 4.3% in Q2, reflecting a K-shaped economy. External demand is resilient while domestic demand continues to be a key drag.

Trade

External trade momentum was robust. Exports accelerated from 15.5% yoy in Jan–May to 17.6% in 1H. High-tech exports were the key driver, with growth reaching 52.2% YoY alongside the AI supercycle. Automobile shipments have soared by almost 70%. Demand for China’s EVs is surging thanks to higher oil prices. Imports also rose 26.6% yoy ytd, reflecting higher purchases of intermediate goods as manufacturers responded to firmer export orders. Trade with the US also improved. Exports to the US recovered from decline of 16.3% yoy in Q1 to 0.2% growth in 1H, reflecting improved bilateral sentiment following the Xi–Trump summit.

Industrial production

Industrial activities were resilient, as war-related supply chain disruption eased. Production grew 5.4% yoy in 1H. While anti-involution measures have weighed on some oversupplied sectors, high-tech manufacturing was a key growth driver. Integrated circuits and industrial robot production rose 23.1% yoy and 28.0%, respectively.

Fixed asset investment (FAI)

Investment sentiment was tepid. Decline in FAI widened from -4.1% yoy ytd in May to -5.7% in June. Private investment extended its decline to 8.5% yoy. Investment sentiment stayed weak across most sectors. Looking ahead, however, policy support may help stabilise the outlook.

Real estate sector continued to subtract from growth. Property investment fell 18.0% in 1H, as developers continued prioritizing project completion over new starts. Elevated inventories (33 months of residential turnover) weigh on prices and sales. Improvements were largely contained in Tier 1 cities.

Retail sales

Household sentiment stayed weak. Retail sales growth decelerated to 1.3% yoy in 1H, reflecting subdued income growth and uncertain employment conditions. Precautionary savings were elevated, while weakening property prices continued to erode household wealth effects, suggesting consumption is likely to be subdued.

On a brighter note, Beijing is making concrete measures to boost consumption in the medium-term. Authorities have set a clear target at 15th Five Year Plan, where retail sales value is expected to jump from RMB5trn in 2025 to RMB6trn in 2026. This implies CAGR of 3.71% over the next 5 years.  

Loan and deposit

Monetary indicators stayed soft. Outstanding loan growth continued to weaken, reaching a two-decade low of 5.2% yoy in June. Medium- to long-term lending to both corporates and households contracted, suggesting continued early loan repayments and restrained financing demand. The M2–M1 spread widened to 4.0 ppts in June, suggesting sluggish investment and consumption demand. Long-end CGB bid-to-cover ratios have reached record high lately, suggesting banks are increasing their allocations to bonds amid weak credit demand.

Inflation

Producer and consumer prices continue to diverge. PPI accelerated further to 4.1% yoy in June, with higher raw material prices offering some support to upstream industrial profitability. However, rising input costs are likely to compress margins for downstream manufacturers and retailers. Meanwhile, headline CPI was up just 1.0% yoy, continuing to trail PPI substantially, highlighting still-soft domestic demand conditions.

Conclusion and implication on policy rates

We expect no cuts to the 1Y LPR over the next 18 months. Instead, policy support is likely to lean more on fiscal expansion to bolster growth. A resilient external sector, alongside improving trade relations with the US, could help stabilise overall growth momentum. Against this backdrop, policymakers appear comfortable maintaining a targeted easing approach rather than pursuing broad-based rate cuts.

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Mo Ji, Ph.D. 纪沫

Chief China Economist - China & Hong Kong 首席中國經濟學家 - 中國及香港
mojim@dbs.com

Nathan Chow 周洪禮

Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
nathanchow@dbs.com

 

Samuel Tse 謝家曦

Senior Economist- China & Hong Kong 資深經濟學家 - 中國及香港
samueltse@dbs.com


Byron Lam 林逢雋

Economist 經濟學家 - 中國及香港
byronlamfc@dbs.com

 


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