External demand support, fiscal follow-through, and reflation to underpin China’s growth in H2 2026

Overview

This report is Deutsche Bank’s macro outlook for China in H2 2026. It argues that China’s economy is showing a “two-speed” pattern: external demand and AI-related industrial chains remain strong, while domestic demand—especially consumption and real estate—is still in the early stage of recovery. Growth briefly slowed in Q2 due to diminishing marginal effects from consumption subsidies, weakening consumer confidence, oil price pass-through, and slower fiscal spending, but in H2, export resilience, renewed fiscal spending, stabilization in tier-1 and strong tier-2 city property markets, and PPI reflation are expected to jointly support growth.

Core views

The core views include: first, the full-year GDP growth forecast is 4.7%, down slightly by 0.2 percentage points from the April forecast but above the 4.5% forecast at the start of the year; second, exports remain the main growth engine, with AHEAD factors driving continued upside surprises in China’s foreign trade; third, consumption may improve modestly in H2, but fading subsidies and weak confidence will limit elasticity; fourth, the real estate downturn may be nearing its end, though the recovery will be slow and regionally differentiated; fifth, PPI reflation is stronger than CPI and is expected to support industrial profits and nominal GDP; sixth, the PBOC is expected to stay on hold, while fiscal policy will take on more of the growth-stabilization role; seventh, RMB appreciation and internationalization are expected to accelerate.

Analysis framework

The report adopts a top-down macro framework, breaking growth into five lines of analysis: external demand, domestic demand, real estate, policy, and prices. It combines trade data, consumption surveys, real estate transactions and inventories, PPI/CPI, fiscal revenues and expenditures, banking system liquidity, REER valuation, and cross-border RMB usage to form its judgments. The focus is not just on a single aggregate forecast, but on explaining the interaction among strong exports, weak domestic demand, rising prices, and changes in the policy mix.

Methodology notes

• Trade competitiveness frameworkAHEAD factors

  Agentic AI, HALO/heavy assets, energy cost advantages, accelerated green transition, export market diversification

  The report uses the AHEAD framework to explain the resilience of China’s exports, arguing that demand for AI-related products, manufacturing heavy-asset capacity, energy cost advantages, green industrial chains, and market diversification together support strong export growth in 2026.

• Macro cycle frameworkTwo-speed economy and K-shaped divergence

  Growth divergence with strong external demand and weak domestic demand

  The report attributes the Q2 slowdown to still-strong external demand and some industrial sectors, while consumption, real estate, and the fiscal impulse weakened, creating a two-speed divergence in the growth structure.

• Price and profit frameworkReflation path

  PPI-driven recovery in nominal GDP and corporate profits

  The report believes the shock from imported oil prices has largely ended, but AI investment, anti-involution policies, and pass-through from upstream prices to mid- and downstream sectors will continue to push up PPI, thereby supporting industrial profits and nominal growth.

• Exchange rate valuation frameworkREER valuation

  Undervaluation of the RMB real effective exchange rate

  The report notes that the RMB is still undervalued by about 10% on a REER basis relative to the 2015-2020 average. Combined with strong exports and policy-driven RMB internationalization, this supports continued RMB appreciation.

• Consumer surveydbDIG survey

  Consumer confidence and willingness for discretionary spending

  The report cites Deutsche Bank’s proprietary dbDIG survey, showing that in Q2, improvements in consumers’ financial conditions and expectations for future income growth fell by 6 percentage points and 2 percentage points respectively, while willingness to increase discretionary spending dropped to 46%.

Asset mapping & comparison

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

• China macro growth

  Positive in the base-case scenario

  Strengths

  Strong exports, renewed fiscal acceleration in H2, and nominal GDP supported by reflation.

  Weaknesses

  Weak consumer confidence, slow real estate transmission, and weaker domestic demand and fiscal impulse in Q2.

  Comparison

  The full-year forecast is 4.7%, above the 4.5% forecast at the start of the year, but slightly lower than the April forecast.

  Risks

  Fiscal support may come in below expectations, consumption may continue to weaken, and real estate stabilization signals may prove inconsistent.

• RMB

  Beneficiary asset of appreciation and internationalization

  Strengths

  Strong exports, FX settlement, about 10% REER undervaluation, and policy support for RMB internationalization.

  Weaknesses

  The bilateral exchange rate against the U.S. dollar remains constrained by the dollar cycle and global risk appetite.

  Comparison

  The report forecasts 6.55/USD by end-2026 and 6.3/USD by end-2027.

  Risks

  Broad U.S. dollar strength may pause RMB appreciation against the dollar, though it may still appreciate against a basket of currencies.

• China export chain and AI supply chain

  Core beneficiary direction

  Strengths

  AHEAD factors support exports, AI-related product trade is growing rapidly, and industrial activity remains resilient.

  Weaknesses

  Some traditional industries such as fossil fuels and chemicals are dragging on industrial production.

  Comparison

  The export forecast is raised to 14% for the full year, while AI-related imports and exports grew more than 80% YoY in May.

  Risks

  Trade negotiation uncertainty, changes in tariffs and restrictions, and slowing overseas demand.

• China consumer services

  Moderate recovery

  Strengths

  Lower fuel costs, rising fiscal spending, policy support for services consumption, and inbound tourism may improve consumption.

  Weaknesses

  The marginal effect of subsidies is fading, consumer confidence is weakening, and willingness for discretionary spending has fallen to a one-year low.

  Comparison

  The report expects only limited improvement in consumption in H2, more as marginal repair than a strong rebound.

  Risks

  Further declines in income expectations, continued price increases suppressing real demand, and insufficient stimulus for services consumption.

• China real estate

  Localized stabilization but slow recovery

  Strengths

  Existing home transactions are improving in tier-1 and strong tier-2 cities, inventories are falling, and rents are stabilizing.

  Weaknesses

  A nationwide recovery has not yet emerged, and transmission to new home sales, land revenue, and investment remains slow.

  Comparison

  The real estate downturn has entered its fifth year, with cumulative existing home price declines exceeding 20%, close to the characteristics of troughs in major historical cycles.

  Risks

  The rebound may be limited to a few cities, inventory destocking may be insufficient, and real estate may continue to drag on investment.

• China interest rates and banking system

  Policy rates likely to remain stable

  Strengths

  Banking system liquidity is ample, and structural tools can provide targeted support for AI, new infrastructure, and services.

  Weaknesses

  Loan and investment demand is weak, and bank net interest margin has fallen to 1.40%.

  Comparison

  The report believes there is limited room for further broad-based PBOC rate cuts, and fiscal policy will become the main driver of growth stabilization in H2.

  Risks

  If growth again falls significantly short of target, the policy reaction function may change; pressure on bank profitability may also constrain credit expansion.

Key data

• 2026 GDP growth forecast4.7%Down 0.2 percentage points from the April forecast, but above the 4.5% in the start-of-year outlook.
• Quarterly GDP forecastQ2 4.4%, Q3 4.6%, Q4 4.7%The report expects a brief slowdown in Q2, followed by a recovery in momentum in H2 as oil prices decline and fiscal policy re-accelerates.
• Full-year export growth forecast14%Supported by AHEAD factors, the report raises its full-year export growth forecast.
• AI-related tradeCombined imports and exports rose by more than 80% YoY in MayThis shows strong demand for AI-related products and is an important source of export and import resilience.
• Nominal GDP growthQ2 6.6%, above 7% in H2Reflation is driving nominal growth significantly above the sub-5% level of the past four years.
• PPI forecast3.0% for the full year, 4.5% by year-endThe PPI rebound is supported by AI investment, anti-involution policies, and price pass-through.
• CPI forecast1.3% for the full year, around 1.6% by year-endCPI recovery is slower than PPI, mainly due to weak consumer demand and lagged pork price pass-through.
• Industrial profitsUp 18.8% in the first five monthsA four-year high, with current improvements concentrated in export-, AI-, and energy-related industries.
• Bank net interest margin1.40% in Q1 2026Net interest margin is at a new low, limiting room for further broad-based PBOC rate cuts.
• RMB forecast6.55/USD by end-2026, 6.3/USD by end-2027The appreciation view is based on strong exports, REER undervaluation, FX settlement, and policy support for RMB internationalization.
• RMB REER valuationAbout 10% undervalued relative to the 2015-2020 averageThe report believes gains in manufacturing productivity leave room for further RMB appreciation.
• Existing home price adjustmentCumulative decline of more than 20%The real estate downturn has entered its fifth year, with duration and decline approaching the characteristics of troughs seen in major historical overseas cycles.
• Inbound tourism and service exportsTravel service exports rose 50%, reaching 1.6x the 2019 levelVisa policy easing may make foreign tourist spending in China a new growth driver for services consumption.

Impact & implications

The asset and policy implications lean toward “improving nominal growth, with structural opportunities stronger than a broad aggregate recovery.” Export chains, AI supply chains, and some upstream and midstream industrial goods benefit from external demand and rising PPI; the RMB is supported by strong exports, REER undervaluation, and internationalization policies; China’s rate curve lacks catalysts for further broad-based rate cuts, with policy support more likely to come through fiscal and structural tools; consumption and real estate may improve at the margin, but this looks more like a slow repair than a rapid reversal. Overall, the report’s view on China’s macro growth is constructive, but it emphasizes uneven recovery in domestic demand and real estate, while the U.S. dollar and trade policy may still disrupt the FX and export path.

Risks

• Consumer confidence continues to weaken, and after subsidy roll-offs there is no new stimulus of comparable scale, causing domestic demand recovery to undershoot expectations.
• Re-acceleration in fiscal spending falls short of expectations, or projects related to the 15th Five-Year Plan are implemented more slowly than expected.
• Real estate stabilization remains concentrated in only a few high-tier cities and fails to transmit effectively to new home sales, land revenue, and investment.
• Oil prices, upstream prices, or pork price paths deviate from forecasts, making the PPI and CPI trajectory inconsistent with the report’s assumptions.
• Broad U.S. dollar strength suppresses the RMB’s appreciation path against the dollar.
• China-U.S. or China-Europe trade frictions intensify again, weakening exports and the support from AHEAD factors.
• Rising PPI fails to pass through smoothly to mid- and downstream sectors, preventing a broader improvement in corporate profits.

What to watch

• Whether the July Politburo meeting signals renewed fiscal acceleration and pro-growth policy support.
• The pace of fiscal spending in H2, local government project launches, and implementation of major 15th Five-Year Plan projects.
• Export growth, AI-related product imports and exports, and the recovery in trade with the U.S.
• Consumer confidence, willingness for discretionary spending, airline passenger traffic, tourism, catering, and services consumption data.
• Existing home transactions, inventories, and rents in tier-1 and strong tier-2 cities, and their transmission to new home sales and the land market.
• Whether rising PPI spreads from export-, AI-, and energy-related industries to midstream and downstream sectors.
• The pace of pork price recovery and its lagged pass-through to CPI.
• Whether the PBOC continues to keep policy rates unchanged, and the strength of structural tools directed toward AI, new infrastructure, and services.
• RMB REER, exporters’ FX settlement, and the use of RMB in cross-border payments and financing.
• The impact of the U.S. dollar index and global risk appetite on the RMB/USD exchange rate.