Nomura expects China's real GDP growth in Q2 to slow to 4.1%, with weak domestic demand and investment remaining the core drags

Overview

This Nomura Asia Economics report focuses on a preview of China's June and Q2 2026 macro data. The report argues that major economic activity data in April and May have already confirmed that the Q1 growth rebound was short-lived, and that June is unlikely to see a significant rebound. Nomura maintains its forecast of 4.1% y-o-y real GDP growth in Q2, below 5.0% in Q1; nominal GDP may remain relatively stable as the GDP deflator turns positive, but domestic demand remains weak.

Core views

The core view is that China's growth slowdown shows a resonance between both supply and demand. On the supply side, industrial and services output growth slowed notably from Q1; on the demand side, retail sales and fixed asset investment weakened again, property investment contracted sharply, and consumption was hit by the fading impact of the trade-in policy, weak household confidence, and K-shaped divergence. Exports still maintained relatively high nominal growth, but a large part came from AI supercycle-driven increases in chip and electronics prices, so the boost to real exports was weaker than the nominal reading suggested. In terms of policy implications, the renewed sharp decline in investment is inconsistent with Beijing's goal of stabilizing investment, so the report expects bond issuance to accelerate and fiscal spending to increase in the coming months.

Analysis framework

The report uses a cross-validation approach between the supply side and demand side: it first reviews published data for April and May such as industrial production, services, retail, FAI, and exports, then combines June PMI, petrochemical operating rates, port throughput, property sales, bond financing, and high-frequency price indicators to form a Q2 forecast. Since China's GDP accounting is mainly production-based, the report believes official GDP readings are more likely to align with supply-side indicators, while demand-side data imply that the slowdown may be deeper.

Methodology notes

• Growth DecompositionCross-validation of Supply Side and Demand Side

  Use production-side and expenditure-side indicators together to assess Q2 GDP

  The supply side focuses on industrial value-added and services output, while the demand side focuses on retail sales, fixed asset investment, and exports; both show slower Q2 growth, but the weakening is more pronounced on the demand side.

• Nominal vs. Real GrowthGDP Deflator Tracking

  Distinguish price factors from a genuine recovery in demand

  The report expects CPI, PPI, and the GDP deflator to rise and support nominal GDP, but the price increases mainly come from oil prices, chips, and external shocks, and do not represent a strong recovery in domestic demand.

• High-frequency Data ValidationTracking PMI, ports, petrochemicals, property, and bond financing

  Use high-frequency indicators to verify June economic momentum

  The report tracks indicators such as EPMI, RatingDog PMI, refinery and chemical operating rates, port container throughput, home sales, government bond issuance, DR007, and the 10-year government bond yield to assess production, trade, property, and credit conditions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Macroeconomy

  Core subject covered by the report

  Strengths

  Nominal export growth remains high, and a positive GDP deflator may support nominal growth.

  Weaknesses

  Real GDP, retail, FAI, property, and credit all show slowing growth momentum.

  Comparison

  Q2 real GDP is forecast at 4.1%, clearly below 5.0% in Q1.

  Risks

  If domestic demand continues to weaken, official growth targets and corporate earnings may face greater pressure.

• China Government Bonds and Rates Market

  Fiscal bond issuance, monetary conditions, and credit growth will affect bond yields

  Strengths

  The average monthly 10-year CGB yield edged down to 1.730%, and the weak growth environment supports duration assets.

  Weaknesses

  DR007 rose to 1.436%, above the PBoC 7-day OMO reverse repo rate of 1.40%, indicating marginal tightening in short-end liquidity.

  Comparison

  Net government bond financing is below the same period last year, and fiscal support has not yet clearly scaled up.

  Risks

  If policy accelerates bond issuance and fiscal spending, supply pressure and inflation disturbances may affect rate trends.

• China Equity Market and Sector Rotation

  Macro data affect earnings expectations and style divergence

  Strengths

  AI, semiconductors, electronics, and parts of the export chain are still supported by pricing and external demand.

  Weaknesses

  Autos, durables, consumption, the property chain, and domestic-demand sectors are under pressure.

  Comparison

  The report emphasizes K-shaped divergence: AI-related assets are stronger, while property and traditional domestic-demand assets are weaker.

  Risks

  If the AI price cycle cools or external demand weakens, support for the export and electronics chains may fade quickly.

• Commodities and Upstream Manufacturing

  Oil prices, metals, chips, and new energy materials prices affect PPI and import values

  Strengths

  LME metals, AI-related products, and new energy materials prices continue to support PPI.

  Weaknesses

  Falling oil prices weaken pricing support for oil-related industries, and petrochemical operating rates are disrupted.

  Comparison

  Brent oil price growth slowed from 68.3% y-o-y in May to 21.8% in June, but remains at a relatively high level.

  Risks

  The Middle East situation, falling oil prices, or changes in supply chain disruptions could alter the path of inflation and industrial production.

• Property Chain

  Property investment, sales, and house prices are important drags on domestic demand and investment

  Strengths

  Existing home prices in tier-one cities show localized signs of stabilization, with some improvement in cities such as Shanghai and Shenzhen.

  Weaknesses

  The decline in the national average price has widened, lower-tier cities face greater price pressure, and property investment is expected to remain in deep negative growth.

  Comparison

  June monthly property investment growth is expected at -25.0%, weaker than -24.3% in May.

  Risks

  Intensifying K-shaped divergence in property may continue to drag on household confidence, local government finances, and investment demand.

Key data

• Q2 real GDP growth forecast4.1% y-o-yBelow 5.0% in Q1; the report believes the Q1 rebound is unlikely to continue.
• Q2 GDP deflator forecastabout 1.0% y-o-yTurning positive from -0.1% in Q1, but mainly driven by external price factors.
• June official manufacturing PMI forecast49.8Below May's 50.0, reflecting weak domestic demand and upstream supply chain disruptions.
• June official non-manufacturing PMI forecast49.8Below about 50.1 in May, with weak tourism consumption during the Dragon Boat Festival holiday being one drag.
• June RatingDog manufacturing PMI forecast51.5Below May's 51.8, but still supported by export resilience driven by the AI cycle.
• June industrial production growth forecast4.5% y-o-yFlat versus May, with supply disruptions caused by the Middle East conflict still affecting the petrochemical chain.
• June export growth forecast16.2% y-o-yModerately down from 19.4% in May; nominal exports remain strong but the real boost may be weaker.
• June import growth forecast26.2% y-o-ySlightly down from 27.4% in May, with oil, gas, and chip prices still lifting import values.
• June trade surplus forecastUSD111.3bnAbove May's USD105.4bn.
• June CPI forecast1.2% y-o-yFlat versus May, with weaker food drag but declining support from energy and core prices.
• June PPI forecast4.0% y-o-yAbove May's 3.9%, supported by a low base, metals, AI-related products, and new energy materials prices.
• June retail sales growth forecast0.9% y-o-yOnly a limited improvement from -0.6% in May, with autos, durables, and consumer electronics dragged by fading policy support and price factors.
• June monthly fixed asset investment growth forecast-8.4% y-o-yA slight improvement from -10.7% in May, but H1 cumulative growth is expected at -5.3%.
• June monthly property investment growth forecast-25.0% y-o-yFurther deterioration from -24.3% in May, with year-to-date growth expected at -18.2%.
• June new total social financing forecastRMB3,477bnBelow RMB4,225bn in the same period last year, with insufficient government bond financing dragging on credit expansion.
• June new RMB loans forecastRMB1,647bnBelow RMB2,240bn in the same period last year.
• June outstanding TSF growth forecast7.4% y-o-yBelow 7.7% in May, with outstanding RMB loan growth expected to slow to 5.3%.
• June M2 growth forecast8.4% y-o-yBelow May's 8.6%.

Impact & implications

In terms of investment implications, the report takes a cautious view on China's short-term growth momentum. Domestic demand, investment, and the property chain remain the main pressures, while the stronger parts of exports and inflation readings are driven more by price factors such as AI, chips, oil prices, and metals, and should not be simply interpreted as a demand recovery. If the government wants to stabilize investment, it is more likely to accelerate central and local government bond issuance and raise fiscal spending intensity; at the same time, continued declines in credit growth and a rise in short-end funding rates suggest that liquidity and financing conditions still need to be monitored.

Risks

• Domestic demand continues to weaken, causing retail, services, and investment to fall short of expectations.
• The decline in property sales, prices, and investment deepens, dragging on household confidence and local government finances.
• If government bond issuance and fiscal spending do not accelerate, public investment will struggle to stabilize FAI.
• Nominal exports and PPI boosted by AI and chip prices may be misread as a genuine recovery in demand.
• The Middle East situation, oil prices, and transportation disruptions may alter the paths of imports, inflation, and industrial production.
• Credit growth continues to slow, and corporate financing and real-economy investment appetite weaken further.

What to watch

• Whether June official manufacturing PMI, non-manufacturing PMI, and RatingDog manufacturing PMI confirm the view that they are below the expansion-contraction threshold.
• June data for industrial production, retail sales, FAI, property investment, exports, imports, CPI, PPI, and social financing.
• The pace of central and local government bond issuance, and whether fiscal spending accelerates meaningfully in the coming months.
• High-frequency property sales, existing home prices, and the Iceberg Index, especially the divergence between tier-one and lower-tier cities.
• The impact of Brent oil prices, LME metal prices, and chip and consumer electronics prices on PPI, imports, and export values.
• The PBoC Monetary Policy Committee meeting, the Q2 monetary policy report, the July Politburo meeting, and the year-end Central Economic Work Conference.
• Events such as President Xi's state visit to the US on September 24, the National Day Golden Week, APAC Shenzhen, and the G20 Summit that may affect external demand, policy, and market expectations.