The Investment Gap Has Replaced Weak Consumption as the Key Factor Behind China’s Growth Deviation from Its Pre-Pandemic Trend

Overview

The report re-examines China’s post-pandemic growth performance from the perspective of expenditure-side GDP. The traditional narrative focuses on weak consumption and the property downturn, but the report argues that the more noteworthy issue is that insufficient investment has spread to manufacturing and infrastructure. The domestic demand gap is currently being filled mainly by strong exports, and this growth structure increases the economy’s sensitivity to global demand, tariff policy, and trade frictions. Whether faster execution of the existing fiscal budget in the second half can drive actual investment will determine whether full-year growth can stabilize at around 4.5%.

Core views

First, weak household income expectations, high precautionary savings, losses in housing wealth, and inadequate social security jointly suppress consumption, and targeted subsidies alone are unlikely to deliver a strong recovery. Second, total investment is about 8.5% below its pre-pandemic trend, with real estate explaining only about half of the gap and the rest mainly coming from infrastructure and manufacturing. Third, the constraints on manufacturing investment stem more from expected returns, profitability, and overcapacity than from insufficient financing. Fourth, exports have shifted from a temporary buffer to a core growth engine, but supply-chain rerouting has not truly eliminated dependence on U.S. and Western end demand. Fifth, future capital expenditure will show a policy-led divergence, with support for artificial intelligence infrastructure and strategic industries, while real estate and some overcapacity sectors are unlikely to see a broad-based investment boom. Sixth, fiscal resources themselves are not insufficient; the main issue is slow execution. If spending and project implementation accelerate in the second half, full-year growth is likely to approach 4.5%.

Analysis framework

Using the pre-pandemic trend as a benchmark, the report measures the level gaps in real GDP, consumption, and investment, and breaks down the investment gap into contributions from real estate, manufacturing, and infrastructure. It also analyzes the compensating role of net exports, the impact of supply-chain rerouting on judging the end demand for exports, and the transmission relationship among fiscal issuance, fund deployment, and actual investment. Finally, combining the pace of policy execution, the trade environment, and the direction of capital expenditure in key industries, it assesses growth scenarios for the second half and full year of 2026.

Methodology notes

• Macroeconomic Growth AnalysisExpenditure-Side GDP Framework

  Identify growth drivers and gaps from the three expenditure components of consumption, investment, and net exports.

  This framework reveals structural differences behind headline growth: both consumption and investment are weaker than trend, while net exports have taken on the main role of filling the gap.

• Trend AnalysisPre-Pandemic Trend Gap Analysis

  Compare the level of real economic activity with the extrapolated pre-pandemic trend.

  Based on this, the report estimates that real GDP, consumption, and investment are about 1.5%, 3.5%, and 8.5% below trend, respectively, to measure the degree of insufficient recovery.

• Structural DecompositionInvestment Gap Contribution Decomposition

  Break down the total investment gap into sources from real estate, manufacturing, and infrastructure.

  Real estate explains about half of the total gap; of the remaining portion, manufacturing accounts for about one-third and infrastructure about two-thirds, indicating that weak investment is no longer solely a real estate issue.

• Foreign Trade AnalysisValue-Added and Trade Rerouting Analysis

  Distinguish between bilateral nominal export destinations and sources of final demand.

  Export growth to ASEAN and other Asian economies may include supply-chain rerouting, so bilateral data may exaggerate the degree of end-market diversification.

• Policy Transmission AnalysisFiscal Execution and Investment Verification Framework

  Verify policy effects sequentially through bond issuance, fiscal fund deployment, and actual infrastructure and manufacturing investment.

  Bond issuance is only a leading signal; the indicator that truly determines growth is whether funds can translate into actual investment. If there is still no improvement in August to September, the need for additional stimulus will rise.

Asset mapping & comparison

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

• China Equity Market

  With growth close to the lower bound of the target and industry capital expenditure highly divergent, the market is more likely to show structural opportunities rather than a broad cyclical upswing.

  Strengths

  Fiscal acceleration, export resilience, and support for strategic industries can stabilize earnings expectations.

  Weaknesses

  Insufficient consumption and private investment limit overall revenue and profit expansion.

  Comparison

  Artificial intelligence infrastructure and strategic manufacturing have greater policy advantages relative to real estate and traditional overcapacity sectors.

  Risks

  Poor fiscal transmission, slowing external demand, escalating trade frictions, and intensified price competition.

• Artificial Intelligence Infrastructure and Power Equipment

  They are priority capital expenditure areas under the 15th Five-Year Plan and the construction of “computing power, connectivity, and electricity.”

  Strengths

  They benefit from policy resource tilts and demand for data centers, power grids, computing networks, optical fiber interconnection, and industrial automation.

  Weaknesses

  Some spending has not yet been fully captured by traditional investment statistics, and uncertainty remains over project returns and commercialization pace.

  Comparison

  Compared with general manufacturing and overcapacity sectors, investment certainty and policy support are stronger.

  Risks

  Local fiscal constraints, project execution delays, technological limitations, and potential external sanctions.

• Real Estate and Related Industrial Chains

  Structural transformation continues to reduce the economy’s reliance on real estate and construction activity.

  Strengths

  If growth falls significantly below the target, policy may provide some support to establish a floor.

  Weaknesses

  Real estate investment continues to contract, and its historically high contribution to growth has turned into a negative drag.

  Comparison

  Compared with artificial intelligence infrastructure and strategic manufacturing, real estate is less likely to receive broad-based capital expenditure stimulus.

  Risks

  Deterioration in housing wealth effects, insufficient demand, prolonged destocking, and persistent deflationary pressure.

• Chinese Government Bonds

  Faster bond issuance and fiscal fund deployment in the second half are important leading signals for stabilizing growth.

  Strengths

  There is still considerable room to execute the existing budget, allowing support to be strengthened without immediately raising the annual spending ceiling.

  Weaknesses

  Issuance does not equal actual spending, and risk aversion among local officials may slow project implementation.

  Comparison

  Compared with the scale of issuance, an actual rebound in infrastructure and manufacturing investment better verifies the fiscal effect.

  Risks

  Fiscal execution remains slow, or additional supply is introduced to meet the target, changing interest rate expectations.

• Renminbi and Export-Related Assets

  Exports have become a key stabilizer of short-term growth, making the exchange rate and export companies more sensitive to external demand and trade policy.

  Strengths

  Supply-chain adjustments, market share gains, and penetration into emerging markets support export resilience.

  Weaknesses

  The degree of end-demand diversification may be lower than bilateral trade data suggest.

  Comparison

  The importance of exports to growth has exceeded the buffering role played by real estate and traditional investment in previous cycles.

  Risks

  U.S. Section 301 tariffs, tighter transshipment enforcement, U.S.-China and China-EU frictions, slowing global demand, and geopolitical conflicts.

Key data

• Real GDP Trend GapAbout -1.5%The level gap relative to the pre-pandemic trend five years after the pandemic.
• Consumption Trend GapAbout -3.5%Household income expectations, precautionary savings, and housing wealth losses jointly suppress demand.
• Total Investment Trend GapAbout -8.5%Only about half is explained by insufficient real estate investment.
• 2025 Real Estate Investment Growth-17.2%It remains an important drag on investment, but is not the only source.
• 2030 Retail Sales of Consumer Goods TargetRMB 60 trillionCorresponds to a compound annual growth rate of about 3.7% from 2026 to 2030.
• Retail Sales Growth in the First Half of 20261.3%To maintain the path implied by the plan, the second half needs to accelerate significantly.
• Historical Growth Contribution of Real EstateAbout 3.0 to 3.5 percentage pointsRefers to the estimated contribution of direct and indirect real estate activity to overall growth in the past.
• Share of the New Economy in GDPAbout 10% to 15%The base is relatively small and not yet sufficient to fully offset the decline in real estate’s contribution.
• Real Growth in the Second Quarter of 20264.3% year-on-yearBelow market expectations and the government’s full-year target range of 4.5% to 5.0%.
• Full-Year 2026 Growth ForecastAbout 4.5%Based on the judgment that accelerated fiscal execution in the second half will drive a recovery in investment.

Impact & implications

At the macro level, China’s growth mix is shifting from real estate and broad-based investment-driven growth toward exports and targeted strategic investment-driven growth. Economic growth can remain resilient, but the foundation of endogenous demand is weak. At the asset level, artificial intelligence infrastructure, data centers, power grids, computing power networks, optical fiber interconnection, high-end equipment, semiconductors, and industrial automation may receive sustained policy support; real estate and some overcapacity sectors such as electric vehicles, batteries, photovoltaics, and chemicals face constraints on profitability and capital expenditure. Faster fiscal issuance helps stabilize growth expectations, but it constitutes effective validation only if it translates into physical investment in infrastructure and manufacturing. Export-related assets still have support, while also being more vulnerable to shocks from U.S. tariffs, transshipment regulation, China-EU trade frictions, and changes in global demand.

Risks

• A significant slowdown in global demand weakens the ability of net exports to compensate for the domestic demand gap.
• The United States raises tariffs or strengthens enforcement against transshipment trade, putting pressure on exports.
• U.S.-China relations deteriorate, with new sanctions targeting Chinese artificial intelligence models or related technologies.
• China-EU trade frictions escalate, affecting export sectors such as electric vehicles, batteries, and photovoltaics.
• Local government debt pressure and risk aversion among officials cause fiscal funds and project execution to remain delayed.
• Consumption lacks support from large-scale income transfers, while high household savings and insufficient services consumption persist.
• Manufacturing overcapacity, thin profits, and price competition suppress private capital expenditure.
• If infrastructure and manufacturing investment fail to recover, full-year growth may fall below the 4.5% to 5.0% target range.

What to watch

• Whether infrastructure investment shows a clear rebound in August to September.
• Whether manufacturing investment can spread from a few policy-supported industries to a broader range.
• The pace of government bond issuance, changes in fiscal deposits, and the speed of actual fund deployment.
• Whether retail sales in the second half of 2026 can be significantly higher than the 1.3% growth rate in the first half.
• Changes in export growth, ASEAN transshipment chains, and U.S. end demand.
• Developments in U.S. Section 301 tariffs, China-EU trade frictions, and potential technology sanctions.
• Actual project starts and spending on artificial intelligence infrastructure, power grids, data centers, and computing power networks.
• Whether policy shifts from conditional support to additional fiscal easing beyond the annual budget.