China Macro Tracker: China and the EU continue negotiations, but pressure on industrial profits, property, and local government debt still warrants attention

Overview

This report is part of HSBC's China Macro Tracker series, focusing on China-EU economic and trade relations, industrial enterprise profits, local government debt resolution, property and infrastructure, travel and logistics, and inflation and liquidity indicators. The main message is that externally, China and the EU are still communicating, but risks of trade and industrial policy friction are rising; internally, the recovery in industrial profits is uneven, policy support may accelerate, but local fiscal conditions and property remain drags.

Core views

First, there is still room for negotiation in China-EU relations, but differences have expanded from tariffs to subsidies, standards, procurement, and strategic technology, creating a risk of escalating mutual countermeasures. Second, although industrial profit growth remains positive, momentum is slowing and divergence is evident: energy, non-ferrous metals, and AI-related industries are performing better, while downstream consumption and the property chain face greater pressure. Third, local government debt resolution remains a policy focus. Front-loaded issuance helps ease risks, but audit-discovered data manipulation shows hidden risks have not been fully eliminated. Fourth, property investment is expected to continue dragging on growth, while infrastructure and construction activity may be supported by faster government bond issuance and the deployment of policy-based financial instruments.

Analysis framework

The report uses a high-frequency macro tracking and segment-level decomposition approach, combining trade policy events, industrial profit distribution by sector, local bond issuance progress, property sales and prices, industrial operating rates, travel and logistics, commodity prices, and interbank liquidity indicators to assess China's short-term growth momentum and policy impulse.

Methodology notes

• Macro trackingChina Macro Tracker

  Combination of high-frequency data and policy events

  It observes weekly or monthly changes in industry, property, travel, logistics, prices, and liquidity, and combines them with policy meetings, bond issuance, and external trade negotiations to assess the macro direction.

• Industry profit analysisIndustrial profit decomposition

  Breakdown of profit contribution across upstream, midstream, and downstream

  The report breaks down industrial profit performance across energy, non-ferrous metals, AI-related electronics, and consumption-, property-, and infrastructure-related industries to judge the breadth and sustainability of the profit recovery.

• Fiscal and debt riskLocal government debt resolution monitoring

  Refinancing bonds, LGFV exits, and hidden debt audits

  It evaluates the quality of local debt risk resolution through the progress of local government refinancing bond issuance, the ratio of LGFV debt to GDP, progress in exit lists, and audit findings.

Asset mapping & comparison

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

• China macro assets

  Core research subject

  Strengths

  Policy support may accelerate, and government bond issuance plus policy-based financial instruments are expected to support infrastructure.

  Weaknesses

  Weak domestic demand, drag from property investment, and an uneven recovery in industrial profits.

  Comparison

  Compared with energy and AI-related sectors, mid- and downstream industries and the property chain are weaker.

  Risks

  Escalating external trade frictions, slower-than-expected policy implementation, and deeper local fiscal constraints.

• Local government debt and LGFV credit

  A key variable in debt resolution and fiscal constraints

  Strengths

  Refinancing bond issuance has been front-loaded, the LGFV debt-to-GDP ratio has edged down, and exit progress is advancing.

  Weaknesses

  Audits found falsified exit data and new hidden debt, suggesting risks may be underestimated.

  Comparison

  Refinancing bond issuance is stronger than the pace of special bond issuance, while project funding support still lags relatively.

  Risks

  Restricted access to high-yield offshore financing, insufficient local revenue, and delays in cleaning up hidden debt.

• Property and infrastructure chain

  Coexistence of growth drag and policy support

  Strengths

  Some high-frequency indicators such as new home sales, existing home transactions, and land sales show signs of seasonal improvement, while infrastructure may benefit from bond and policy finance support.

  Weaknesses

  Property investment is expected to continue dragging, and land sales revenue has fallen sharply.

  Comparison

  Policy support for infrastructure may be stronger than the natural recovery in property.

  Risks

  Housing prices and sales weakening again, insufficient local fiscal revenue, and slow availability of construction funding.

• Industrial and manufacturing sectors

  Main carriers of industrial profits and production activity

  Strengths

  Profits in energy, non-ferrous metals, and AI-related electronics are relatively strong, while global AI capex supports margins in the electronics sector.

  Weaknesses

  Profits are under pressure in consumption-related sectors, autos, photovoltaic batteries, and the property chain.

  Comparison

  Upstream sectors and the AI chain are clearly outperforming mid- and downstream industries.

  Risks

  A decline in energy prices weakening upstream profits, continued weak end demand, and export tax rebate adjustments pressuring electrical machinery profits.

• Commodities and inflation

  Affecting costs, margins, and the policy environment

  Strengths

  Easing tensions in the Middle East and a recovery in global energy supply may alleviate downstream cost pressure.

  Weaknesses

  Earlier increases in energy costs had already compressed downstream margins, and prices of some industrial goods remain weak.

  Comparison

  Falling oil prices help on the cost side, but may also lead to a marginal decline in upstream oil and gas profits.

  Risks

  Geopolitics causing renewed oil price volatility, continued weakness in industrial goods prices, and deflation pressure affecting corporate earnings.

Key data

• China's export structure to the EUIntermediate goods 40%, capital goods 28%, consumer goods 25%Used to show that China-EU trade is deeply embedded in supply chains, so friction could affect a broader industrial chain.
• Industrial profit growth21.1% y-o-yThe report says that despite a low base, industrial profit growth still slowed, indicating weakening momentum.
• Drag from mid- and downstream industriesJan-May drag of 5.5ppt, higher than 4.8ppt in Jan-AprThis shows that beyond energy and AI-related sectors, profit pressure in other industries has increased.
• Profits in some consumption-related industriesApparel about -11%, leather and fur-related products about -19%, rubber and plastics about -1% y-o-yDownstream cost pressure and weak end demand have weighed on profits.
• Profits in furniture, sports and entertainment products, and automobilesAbout -58%, -7%, and -20% y-o-y respectively in the first five monthsThis reflects cautious consumption and weak performance in related categories.
• New policy-based financial instrumentsRMB800 billionThe report believes faster deployment of this tool would help support infrastructure and construction activity.
• Local government refinancing bond issuanceMore than RMB2 trillion, accounting for 73% of the full-year quota of RMB2.8 trillionAs of the end of the first half, issuance was clearly front-loaded.
• LGFV exit progressMore than 82% of LGFVs had exited by 2025The report says debt resolution has made progress, but the quality still requires audit verification.
• LGFV debt-to-GDP ratio46.8% in 2025, 47.2% in 2024HSBC estimates show a slight decline in the ratio.
• Special local government bond issuanceBy the end of June, about 47% of the full-year quota had been issuedThe issuance pace is still below the 2025 level and may accelerate later to support infrastructure.
• Audit findingsIn spot checks, 6% of LGFVs exited the list through data falsificationThe National Audit Office also noted that some regions added new hidden debt through SOEs or reduced reported debt through loan swaps and system data deletion.
• Land sales revenueJan-May down 28.7% year-on-yearThe property downturn continues to constrain local fiscal conditions and debt resolution.
• Non-tax revenueUp 2.2% year-on-year YTD through MayAsset revitalization has helped local revenue to some extent, but the report believes more reforms are still needed.

Impact & implications

In terms of investment implications, this report suggests that China's macro environment remains in a state where policy support coexists with internal and external pressures in the short term. AI-related capital expenditure and profits in some upstream sectors support pockets of resilience in manufacturing, but downstream demand, the property chain, and local fiscal pressure limit the breadth of profit recovery. Externally, substantive progress in China-EU negotiations could ease supply chain uncertainty; if trade remedies and retaliatory measures expand, chemicals, steel, machinery, electrical equipment, electric vehicles, and regional supply chains could be affected.

Risks

• China-EU trade friction could expand from a single industry to subsidies, standards, procurement, and strategic technology, leading to escalating countermeasures.
• Industrial profit growth is concentrated in energy and AI-related sectors, with insufficient breadth in the recovery.
• Property investment continues to drag on growth, and falling land sales revenue weakens local fiscal conditions.
• Data manipulation and new hidden debt exist in local government debt resolution, so actual risks may be higher than headline progress suggests.
• If policy-based financial instruments, government bond issuance, and fiscal reforms are implemented slowly, infrastructure support may prove insufficient.
• Weak domestic end demand limits profit recovery in consumption-related sectors.

What to watch

• Whether the four China-EU working groups can achieve "substantial results" before October.
• Whether the EU expands trade remedy measures against Chinese chemicals, steel, machinery, electrical equipment, and electric vehicles.
• The subsequent issuance pace of local government refinancing bonds and special bonds.
• The deployment speed and allocation of the new RMB800 billion in policy-based financial instruments.
• Whether property sales, housing prices, land sales revenue, and construction activity stabilize.
• Whether the divergence between energy and AI-related sectors and mid- and downstream industries in industrial profits narrows.
• Changes in regulation around LGFV exit lists, hidden debt audits, and high-yield offshore bond issuance.
• The impact of oil prices, agricultural product prices, DR007/R007, and PBOC open market operations on inflation and liquidity.