Domestic demand weakened again in July; HSBC expects policy support to be implemented more rapidly while remaining tilted toward targeted tools

Overview

This edition of China Macro Tracker focuses on three themes: why July economic and credit data indicate persistent weakness in domestic demand, how fiscal and consumption support may be implemented more rapidly, and how the green transition of traditional energy and the People's Bank of China's policy framework will shape the future policy path. The report's core conclusion is that the intensity and pace of near-term support need to increase, but policy will continue to prioritize targeted fiscal, consumption, and structural monetary tools.

Core views

First, July data again showed weak domestic demand. Fixed asset investment and retail sales both fell short of expectations, while weaker-than-expected second-quarter GDP performance made growth pressures more pronounced. Industrial production exhibited clearer K-shaped characteristics: high-tech activity remained robust but was insufficient to offset pressure on consumer-facing downstream sectors and industries dependent on construction demand. Credit data were consistent with this assessment, with medium- and long-term corporate loans and household borrowing remaining the main areas of weakness, although net government bond issuance regained some momentum. The report therefore believes that calls for countercyclical support are growing in both markets and policy circles. Second, official statements indicate increased policy urgency, but the wording concerning growth targets has become more pragmatic. On the day July economic data were released, the State Council plenary meeting emphasized making efforts to achieve the full-year economic and social development targets. Compared with the July 20 State Council executive meeting's call to ensure the achievement of the full-year targets, the report believes this subtle change both reflects a response to recent weak data and demonstrates a more pragmatic stance. The meeting also explicitly noted that insufficient domestic demand remains a prominent problem, challenges facing some industries and enterprises are increasing, and external uncertainty is rising. Third, near-term policy measures will continue to focus on accelerating infrastructure funding and providing targeted support for consumption. The report believes that advancing the “six networks” and major infrastructure projects, together with faster disbursement of fiscal funds, will remain policy pillars, and expects local government special-purpose bond issuance to accelerate again in the coming months. The implementation plan for the RMB800bn (RMB800 billion) new policy-based financial instrument has already been distributed to local governments, with funding focused on new quality productive forces and new urbanization, and is expected to support infrastructure investment. On consumption, policy may focus more on services consumption and lower-tier cities; the 18 county-level consumption policies announced on August 18 exemplify this direction. Faster consumption growth in lower-tier cities during the first half of the year and slightly higher rural retail sales growth than urban growth from January to July 2026 also suggest that county-level consumption still has untapped potential. Fourth, the 15th Five-Year Plans for the coal, oil, and natural gas industries continue to place the green transition at the core of upgrading traditional energy. The relevant plans reiterate the goal of peaking coal and oil consumption, consistent with the national objective of reaching peak carbon emissions before 2030. The report believes that implementing more specific green transition measures will be an important path for upgrading carbon-intensive industries over the next five years, with the expansion of the national emissions trading system serving as a key market-based tool. The carbon market will expand beyond power generation, steel, cement, and electrolytic aluminum to include the petrochemical and chemical industries, and is expected to bring approximately 80% of China's carbon dioxide emissions under more effective regulation. Allowance allocation and market trading will increase compliance costs for inefficient producers, thereby accelerating the exit of outdated capacity. The coal industry plan also calls for guiding small and medium-sized coal mines with weaker safety safeguards to exit and raising the share of capacity from large modern coal mines to 87%. Fifth, the near-term pace of measures to curb “involution-style” competition in the energy sector remains constrained by energy security. July PPI data showed that coal mining prices continued to rise both year on year and month on month amid strengthened safety inspections and tighter regulatory measures; meanwhile, easing tensions in the Middle East and seasonal factors led other raw material prices to weaken month on month. The report believes that the pace of eliminating inefficient capacity in the energy industry depends partly on whether developments in the Middle East affect the stability of China's domestic energy supply. The recent acceleration in coal imports shown by trade data may play a supplementary role in reducing reliance on crude oil. Sixth, the People's Bank of China's second-quarter monetary policy implementation report maintained an “appropriately accommodative” stance and pledged to introduce pragmatic incremental measures when appropriate. However, HSBC believes that near-term policy is more likely to improve transmission efficiency and optimize structural tools rather than immediately implement broad-based interest-rate or reserve requirement ratio cuts, unless domestic demand weakens significantly further. Support priorities include expanding domestic demand, technological innovation, and small and micro enterprises. In terms of liquidity, the People's Bank of China may continue to use open market operations, the medium-term lending facility, and government bond trading, which will also reduce the urgency of a reserve requirement ratio cut in the near term. As government bond issuance may accelerate again in the coming months, fiscal and monetary policy coordination will become another priority. Seventh, the People's Bank of China's 15th Five-Year Reform and Development Plan further reinforces the medium- to long-term direction of structural policy. The plan identifies improving the dual-pillar framework of monetary policy and macroprudential management as its primary task and proposes optimizing targeted support in five major areas: technology, green finance, inclusive finance, pensions, and digital finance, while increasing financial support for consumption. The report therefore concludes that structural monetary policy tools may play a greater role during the 15th Five-Year Plan period. Eighth, weekly high-frequency data show a combination of localized resilience and broad-based weakness. In consumption and travel, intercity travel remained elevated, the number of domestic flights increased, and nationwide box office revenue rose slightly, but auto sales declined modestly year on year in August. In real estate, home prices in first-tier cities rose slightly overall, new home sales declined seasonally, but new home sales in first-tier cities remained above the level of the same period last year. Existing-home transactions in 18 major cities rebounded slightly, and transactions in first- and second-tier cities remained above year-earlier levels, while land sales and the planned gross floor area of transacted land both declined slightly. Ninth, production, logistics, price, and liquidity indicators similarly lacked consistent upward momentum. Semi-steel tire operating rates and PTA production rates declined, blast furnace operating rates remained above historical levels, petroleum asphalt operating rates increased, cement shipment rates and polyester filament operating rates were broadly stable, and coal consumption in eight major provinces declined slightly. The Baltic Dry Index, postal delivery volume, and cargo throughput at major ports declined, metro passenger traffic in major cities remained stable, and container exports from China to the United States increased. In terms of prices, easing tensions in the Middle East recently drove crude oil prices lower, cement and glass prices declined, agricultural product prices rose seasonally, and container freight rates fell. Interbank interest rates declined, while the People's Bank of China made a net liquidity injection through open market operations last week, indicating that liquidity support remains ongoing.

Analysis framework

The report first uses July economic activity and credit data, together with second-quarter GDP performance, to identify weak areas in domestic demand. It then compares the wording of State Council meetings and reviews the implementation levers for fiscal, infrastructure, and consumption policies. It subsequently analyzes the green transition and capacity exit mechanisms through the energy sector's 15th Five-Year Plans, expansion of the carbon market, and changes in the PPI, before combining the People's Bank of China's second-quarter report and reform plan to assess monetary policy tool choices. Finally, it cross-validates the economic pulse using weekly high-frequency indicators covering travel, real estate, industrial operating rates, logistics, commodity prices, and funding rates.

Methodology notes

• Macroeconomic framework

  High-Frequency Macroeconomic Data Tracking

  The report combines monthly economic and credit data with weekly indicators of travel, housing transactions, industrial operating rates, logistics, prices, and liquidity to assess whether domestic demand, production, and financing conditions are improving in tandem.

• Event Games and Behavioral FinanceEvent-driven analysis

  Analysis of Policy Events and Wording Changes

  The report compares the wording used by different State Council meetings concerning full-year targets and combines it with county-level consumption policies, energy plans, and the People's Bank of China's reports to assess policy urgency, implementation priorities, and potential tool paths.

• Industry/Sector Analysis FrameworkUpstream, Midstream, and Downstream Industry Chain Transmission

  Industry Divergence and Policy Cost Transmission

  The report distinguishes among high-tech industries, consumer-facing downstream sectors, construction-related industries, and traditional energy industries, and explains how carbon allowances and trading increase compliance costs for inefficient enterprises, thereby promoting the exit of outdated capacity and industrial upgrading.

• Industry/Sector Analysis FrameworkSupply and Demand Framework

  Domestic Demand and Energy Supply Constraints

  On the one hand, the report uses investment, consumption, and credit to identify insufficient aggregate demand; on the other, it links the pace of capacity reduction in the energy industry to developments in the Middle East, changes in imports, and domestic supply stability.

Key data

• Size of New Policy-Based Financial InstrumentRMB800bnThe implementation plan has been distributed to local governments, with a focus on supporting new quality productive forces and new urbanization.
• County-Level Consumption Policies18 measuresChina released them on August 18, 2026, with the aim of stimulating county-level consumption.
• Estimated Carbon Market Coverageapproximately 80%Following the expansion of the national emissions trading system, approximately 80% of China's carbon dioxide emissions are expected to come under more effective regulation.
• Target Share of Capacity from Large Modern Coal Mines87%The coal industry plan calls for increasing the share of capacity from large modern coal mines.
• National Carbon-Peak Timelinebefore 2030The coal, oil, and natural gas industry plans reiterate alignment with the national carbon-peak objective.
• Consumption in Lower-Tier Citiesgrew relatively quickly in the first half of the yearThe report cites this as evidence that consumption in lower-tier cities still has further potential to be unlocked.
• Rural Retail Salesgrowth from January to July 2026 was slightly higher than in urban areasThis supports the conclusion that policy can further tap the consumption potential of counties and rural areas.
• Monetary Policy Stanceappropriately accommodativeThe People's Bank of China's second-quarter monetary policy implementation report reiterated this stance and emphasized introducing pragmatic incremental measures when appropriate.

Impact & implications

The report believes that the main constraint on economic growth remains domestic demand, while the policy response will be reflected more in accelerated implementation of existing measures: faster deployment of infrastructure funding and government bond issuance, consumption support extending toward services and county-level markets, and monetary policy using structural tools to improve financing in priority areas. Traditional energy industries will simultaneously face green upgrading, rising carbon costs, and energy supply security constraints. The exit of inefficient capacity may accelerate, but its near-term pace is not entirely independent of the external energy environment.

Risks

• Insufficient domestic demand remains a prominent problem, with fixed asset investment, retail sales, medium- and long-term corporate loans, and household borrowing all showing weakness.
• Operating challenges facing some industries and enterprises are increasing, while the resilience of high-tech industries remains insufficient to offset pressure on consumer-facing downstream and construction-related industries.
• Rising external uncertainty may further affect growth and the policy environment.
• Changes in the situation in the Middle East may affect the stability of China's domestic energy supply and constrain the near-term pace of measures to curb “involution-style” competition and eliminate outdated capacity in the energy industry.

What to watch

• Monitor whether local government special-purpose bond issuance accelerates again in the coming months and the actual deployment progress of the RMB800bn new policy-based financial instrument.
• Monitor the pace of major infrastructure projects and construction of the “six networks,” as well as the disbursement of funding.
• Monitor services consumption, the 18 county-level consumption policies, and the unlocking of consumption potential in lower-tier cities and rural areas.
• Monitor allowance allocation, trading, and the exit of outdated capacity following the expansion of the national carbon market into the petrochemical and chemical industries.
• Monitor whether the People's Bank of China continues to rely primarily on open market operations, the medium-term lending facility, government bond trading, and structural tools rather than shifting to broad-based interest-rate and reserve requirement ratio cuts.
• Monitor the impact of developments in the Middle East, coal imports, and changes in crude oil reliance on domestic energy supply stability and the pace of energy policy.
• Monitor whether subsequent investment, retail sales, medium- and long-term corporate loans, household borrowing, and high-frequency real estate data indicate stabilization in domestic demand.