Weakening Domestic Demand in the Third Quarter May Raise the Likelihood of Additional Growth-Stabilization Measures This Autumn

Overview

This report assesses China's growth momentum and policy response in the second half of 2026. It argues that while exports remain resilient, supported by Asian industrial capital expenditure, the recovery in domestic demand remains weak; against rising downside risks to third-quarter growth, the probability of additional growth-stabilization measures this autumn has increased.

Core views

Improving exports do not necessarily translate into strong GDP support: their import-intensive structure limits the contribution from net exports, while overcapacity slows the transmission of export strength to household consumption and corporate investment. Meanwhile, slower fiscal deployment, no evident acceleration in public financing, and policy-bank financing below 2025 levels, combined with broadly weak credit demand and further softening in property sales, all weigh on the third-quarter economy. The report expects that if weak data persist, additional support will remain focused on government investment and quasi-fiscal tools, supplemented by administrative easing in consumption and housing.

Analysis framework

Tracks third-quarter GDP growth and the need for additional policy support through export and import structures, the pace of fiscal and quasi-fiscal financing, policy-bank financing, infrastructure-related high-frequency indicators, household and corporate credit structures, and new-home and existing-home sales performance.

Methodology notes

• Macroeconomic TrackingGrowth Momentum and Policy Transmission Analysis

  Joint assessment of exports, domestic demand, and policy financing

  Combines export strength with its import content and the speed of transmission to domestic demand, while using fiscal, credit, property, and infrastructure indicators to assess the growth gap and policy response.

• Scenario AnalysisPolicy Reaction Function

  Weaker economic data raise the probability of stimulus

  Based on the downside effect of July-August economic data on third-quarter growth forecasts, it extrapolates potential increases in government investment, quasi-fiscal tools, and administrative easing.

Asset mapping & comparison

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

• China Equities

  Macroeconomic growth and policy expectations affect risk appetite and sector allocation

  Strengths

  Additional investment-oriented stimulus could improve expectations for infrastructure, livelihood projects, and policy-supported sectors.

  Weaknesses

  Weak domestic demand, softer property sales, and insufficient credit demand limit the breadth of earnings improvement.

  Comparison

  Export-related sectors are relatively resilient, but their support for overall domestic growth is weaker than headline export data suggest.

  Risks

  Continued delays in fiscal implementation, insufficient stimulus intensity, or a deeper property adjustment.

• China Fixed Income

  Downside growth risks and easing expectations may affect interest-rate and credit pricing

  Strengths

  Economic weakness and expectations of policy support may sustain easing expectations.

  Weaknesses

  If policy shifts toward large-scale investment support, changes in supply and growth expectations may affect interest-rate trends.

  Comparison

  Quasi-fiscal financing tools are more likely than conventional domestic-demand recovery measures to become the focus of incremental support.

  Risks

  Policy timing and financing deployment may fall short of expectations.

Key data

• Third-Quarter GDP Growth Tracking Forecast4.5% year-on-yearThe report states that July-August data pose downside risks to this forecast.
• Fiscal and Quasi-Fiscal Support Yet to Be DeployedApproximately RMB 2 trillionThe report indicates that unused fiscal and quasi-fiscal stimulus capacity remains for August-December.
• Policy Financing ConditionsBelow 2025 levelsPolicy-bank financing remains relatively subdued.
• Property SalesContinuing to weakenNew-home sales remain low, while existing-home sales are trending downward.

Impact & implications

If domestic demand, property, and financing data fail to improve, market expectations for more proactive growth-stabilization policies may rise. Policy beneficiaries may be concentrated in infrastructure and livelihood projects, financing chains related to policy finance, and sectors receiving administrative support for consumption or housing; however, export resilience may not quickly translate into a broad-based recovery in domestic demand.

Risks

• The export recovery may become increasingly reliant on imports, making net exports' support for GDP weaker than expected.
• Overcapacity may continue to constrain the transmission of exports to domestic investment and consumption.
• Delays in fiscal and quasi-fiscal fund deployment may prevent a rebound in infrastructure investment.
• Household deleveraging, insufficient long-term corporate financing, and a shortage of high-quality projects may keep credit demand weak.
• Continued declines in new-home and existing-home sales may weigh on property and related domestic demand.
• The timing, scale, and effectiveness of additional policy support remain uncertain.

What to watch

• July-August and subsequent third-quarter GDP, industrial production, consumption, and investment data.
• Issuance and implementation progress of fiscal spending, local government special bonds, and quasi-fiscal tools.
• Whether public financing and policy-bank financing accelerate.
• Infrastructure-related high-frequency indicators, especially cement shipment performance.
• Changes in household loans, medium- to long-term corporate loans, and credit demand.
• Whether new-home and existing-home sales can stabilize.
• Whether administrative easing measures for consumption and housing are introduced, as well as progress on the 109 major projects in the 15th Five-Year Plan.