Goldman Sachs China June Proprietary Economic Indicators: Activity improved in May, but domestic demand and credit remain weak

Overview

This report updates a set of Goldman Sachs proprietary China macroeconomic indicators covering real activity, domestic demand, macro data surprises, manufacturing and construction proxies, investment, inventories, trade, financial conditions, credit impulse, FX flows, macro policy, fiscal policy, government bond financing, and property policy. Overall, the signals show that economic activity improved in May, but the improvement was concentrated in manufacturing; domestic demand, investment, inventory contribution, financial conditions, and credit expansion remain weak, and the policy mix has yet to form a broad-based easing stance.

Core views

The core view is that China's high-frequency and proprietary activity indicators improved marginally in May, but growth quality in Q2 still faces pressure. The CAI rose from +2.9% in April to +4.6% annualized month-over-month in May, indicating a rebound in real activity momentum; however, the import-implied domestic demand, investment tracker, and inventory indicators suggest that overall demand remains weak. Financial conditions tightened slightly in May, and credit impulse may stay negative in the second half of the year, implying limited support for growth from the financial and credit environment. Fiscal conditions are somewhat tight in the near term, but net government bond issuance is expected to accelerate later on, while property policy continues to move in an easing direction.

Analysis framework

The report adopts a top-down macro monitoring framework, integrating official statistics, mirror data from trade partners, financial market prices, credit quantities, fiscal cash flows, government bond issuance pace, and city-level property policy rules into multiple proprietary indicators to cross-validate marginal changes in China's economic growth, demand, policy, and financial conditions.

Methodology notes

• Real activity indicatorsChina Current Activity Indicator

  CAI uses the first principal component of multiple real activity indicators such as industrial production, electricity generation, and PMI, and converts it into GDP-equivalent units.

  This indicator is used to gauge the sequential momentum of the Chinese economy and can be further broken down into manufacturing, consumption, and other areas.

• Domestic demand indicatorsImport-implied real domestic demand

  Import-implied real domestic demand allocates sectoral imports to final demand sources using China's input-output tables.

  This method infers domestic demand from the import structure and cross-checks it against GDP excluding net exports in the national accounts.

• Macro surpriseChina MAP surprise index

  The MAP surprise index aggregates the importance and strength of economic indicators relative to consensus expectations.

  This indicator is used to judge whether macro data as a whole has come in above or below market expectations over a given period.

• Sector momentum proxiesManufacturing and construction growth proxies

  The construction proxy takes the median of year-over-year growth rates for new housing starts, steel, cement, and glass output; the manufacturing proxy takes the median of year-over-year growth rates for metal-cutting machine tools, automobiles, power equipment, and microcomputers.

  These two proxy indicators are used to observe sub-sector growth momentum in manufacturing and construction.

• Investment trackingInvestment tracker

  The investment tracker is based on seven underlying investment indicators, including commodity demand and output, equipment sales, construction output, and new construction contracts.

  After data cleaning, the first principal component is extracted and mapped to fixed capital formation in actual value-added terms.

• Inventory trackingInventory tracker

  The inventory tracker is based on six inventory indicators, including commodities, PMI subcomponents, industrial enterprise finished-goods inventories, and automobile inventories.

  The indicator is mapped through the first principal component into inventory changes as a share of GDP, which is used to assess the contribution of inventories to sequential GDP growth.

• Foreign trade cross-validationOutside-in trade trackers

  The outside-in trade indicators use mirror statistics reported by major trading partners and combine country-level lead-lag relationships to estimate China's import and export growth.

  This method is used to test the validity and direction of China's customs import and export data.

• Financial conditionsGS China Financial Conditions Index

  GSFCI tracks financing rates, 3-month SHIBOR, M2 and social financing flows, equity valuations, and the trade-weighted RMB.

  Changes in financial conditions can be decomposed into four channels: foreign exchange, equities, credit, and interest rates.

• Policy stanceChina domestic macro policy proxy

  The domestic macro policy proxy summarizes the policy stance across fiscal, monetary, credit, and housing policy.

  This indicator is used to judge whether the policy mix is marginally supportive of or a drag on macro growth.

• Property policyProperty policy relative tightness index

  The property policy relative tightness index tracks demand-side, supply-side, and other housing policy constraints across more than 100 cities.

  It covers dimensions such as purchase restrictions, credit restrictions, sales restrictions, price caps, pre-sales, land transaction taxes, and land supply.

Asset mapping & comparison

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

• China macro assets

  Directly related

  Strengths

  CAI improved, manufacturing proxy indicators rose, and net government bond issuance is expected to accelerate.

  Weaknesses

  Domestic demand is weak, investment is slightly weaker, the inventory contribution to GDP is declining, and macro data came in below expectations.

  Comparison

  Compared with April, real activity indicators were stronger in May, but policy and credit conditions did not ease meaningfully at the same time.

  Risks

  If credit growth remains weak or policy funds are slow to be deployed, the economic improvement may be difficult to sustain.

• RMB- and FX-related assets

  Highly related

  Strengths

  Goldman Sachs' preferred FX flow indicator shows higher FX inflows in May.

  Weaknesses

  The appreciation of the trade-weighted RMB is one of the factors tightening financial conditions, which may put pressure on external demand and the financial environment.

  Comparison

  Improving FX flows and tightening financial conditions occurred at the same time, reflecting a more complex impact of the exchange-rate channel on the macro environment.

  Risks

  External demand, trade frictions, or changes in capital flows could weaken the FX inflow signal.

• China rates and credit assets

  Highly related

  Strengths

  Net government bond issuance is expected to accelerate in the coming months, which may strengthen fiscal fund deployment.

  Weaknesses

  Credit growth is weak, and credit impulse is expected to remain negative in the second half of the year.

  Comparison

  The pace of fiscal financing may improve, but insufficient credit expansion remains the main shortcoming of financial conditions.

  Risks

  If bond supply accelerates but real-economy financing demand remains insufficient, the policy transmission effect may be limited.

• Real estate and property-chain assets

  Related

  Strengths

  The city-level relative tightness index for property policy shows that housing policy continues to ease.

  Weaknesses

  The construction growth proxy has only edged up slightly, while weak domestic demand and credit continue to suppress the property-chain recovery.

  Comparison

  The policy direction is relatively accommodative, but evidence of fundamental improvement remains limited.

  Risks

  Household homebuying demand, price expectations, and developer financing may improve less than expected.

• Manufacturing and industrial goods

  Related

  Strengths

  The improvement in May CAI was mainly driven by manufacturing, and the manufacturing growth proxy edged up slightly.

  Weaknesses

  Weak domestic demand may limit the breadth and sustainability of the manufacturing improvement.

  Comparison

  Manufacturing is performing better than construction and domestic demand.

  Risks

  A pullback in external demand, a weakening inventory cycle, or price pressure could dampen industrial momentum.

Key data

• China CAI in May+4.6% annualized month-over-month, seasonally adjustedApril was +2.9%; the May improvement was mainly driven by the manufacturing sector.
• Import-implied domestic demandWeak growth in Q2The report says this proprietary indicator shows weak domestic demand growth in Q2.
• MAP surprise indexRecently below market expectationsThe 21-day moving average shows that recent macro data has fallen short of market expectations.
• Manufacturing and construction proxy indicatorsBoth edged up slightly in MayThe manufacturing growth proxy and the construction growth proxy both improved marginally in May.
• Investment trackerSlightly weaker growth in Q2The preliminary investment tracker points to slightly slower Q2 growth in actual value-added terms.
• Inventory trackerInventory levels roughly flat in Q2The boost to sequential GDP growth from inventory changes may decline in Q2 2026.
• Outside-in export trackerAbove the official export growth rate in AprilThe April estimate is based on countries with published import data and covers 31.1% of China's 2025 export value.
• Outside-in import trackerBelow the official import growth rate in AprilThe April estimate is based on countries with published export data and covers 65.5% of China's 2025 import value.
• China financial conditions indexSlightly tighter in MayThe tightening was mainly driven by the appreciation of the trade-weighted RMB and weaker equity performance.
• Credit impulseMay remain negative in the second half of the yearThe estimate assumes credit remains flat for the rest of this year.
• FX flowsInflow increased in MayGoldman Sachs' preferred FX flow indicator shows higher FX inflows in May.
• Property policyContinued easingThe city-level relative tightness index for property policy shows that housing policy continued to ease.

Impact & implications

For asset allocation, the report conveys a macro mix of "improving activity but still-weak demand foundations." The improvement in manufacturing may support industrial-activity-related assets in the near term, but weak domestic demand, investment, and credit limit the sustainability of cyclical trades. Tighter financial conditions and negative credit impulse constrain equity valuations, the property chain, and assets sensitive to credit expansion; faster net government bond issuance and continued easing in property policy are key clues for gauging the strength of policy support.

Risks

• Domestic demand recovery falls short of expectations.
• Credit growth remains weak and credit impulse stays negative.
• Financial conditions tighten further, especially through the exchange rate, equities, and credit channels.
• Fiscal fund deployment and government bond issuance are transmitted to the real economy more slowly than expected.
• Easing in property policy fails to bring meaningful improvement in sales, investment, and financing.
• Divergence between mirror trade data and official data may increase uncertainty in judging export and import trends.

What to watch

• Whether the CAI can extend its May improvement and broaden into consumption, housing, and labor-market-related subcomponents.
• Whether import-implied domestic demand and actual domestic demand stabilize after Q2.
• Fiscal spending execution and fiscal deposit changes after government bond net issuance accelerates.
• The combined impact of social financing, M2, interest rates, RMB exchange rates, and equity valuations on GSFCI.
• Whether credit impulse remains negative in the second half of the year.
• After continued easing in city-level property policies, whether sales, starts, and price indicators improve.
• Whether the gap between outside-in trade trackers and customs import and export data widens or narrows.