China’s economic stabilization still depends on fiscal implementation and domestic demand recovery

Overview

The report argues that China’s economic recovery shows clear production-led characteristics, with domestic demand absorption remaining the weak link. Consumption lacks stable support from income and confidence, and subsidies’ boost to durable goods demand may include a front-loading effect; the real estate downturn continues to weigh on housing-related consumption, investment, and households’ long-term borrowing. Exports, high-tech, and equipment manufacturing remain resilient, but rising external trade barriers make it difficult for them to independently support growth. Whether the economy can stabilize in the second half mainly depends on the actual implementation of fiscal funding, bond-funded project starts, and infrastructure spending.

Core views

The baseline scenario is that faster fiscal execution, additional support if necessary, resilient exports, and continued AI-related external demand will drive growth to rebound in the third and fourth quarters, with full-year GDP growth of about 4.6%. However, soft indicators have already weakened, and July hard data will test whether stabilization can continue. Industrial production can still benefit from high-tech, equipment manufacturing, and export-related sectors, while retail sales are constrained by weak confidence and fading subsidy effects; fixed asset investment continues to be dragged down by real estate, and infrastructure stabilization depends on fiscal delivery. Monetary policy may cut rates by 10 basis points in the latter part of the second half, but its role is more of a policy signal than a strong demand stimulus.

Analysis framework

The report combines monthly indicators such as GDP, PMI, trade, industrial production, retail sales, fixed asset investment, inflation, and aggregate social financing, compares year-on-year and seasonally adjusted month-on-month changes, and incorporates high-frequency trade, fiscal bond issuance, project execution, and credit data into its assessment. In the forecasts, it separately evaluates production, domestic demand, external demand, and policy transmission, then forms July data forecasts and the baseline growth scenario for the second half.

Methodology notes

• Macro ForecastingMonthly Economic Indicator Forecasting Framework

  Use year-on-year, seasonally adjusted month-on-month, and high-frequency leading indicators to forecast monthly economic activity.

  The report uses information such as PMI, export orders, fiscal bond issuance, commodity imports, and seasonal credit patterns to forecast trade, production, consumption, investment, prices, and financing data.

• Growth DecompositionProduction and Domestic Absorption Balance Framework

  Distinguish supply-side production resilience from the absorption capacity of domestic demand such as consumption and investment.

  Strong production and export performance does not equate to a broad demand recovery; the report focuses on testing whether output can be sustainably absorbed through household consumption, private investment, and credit demand.

• Policy AnalysisFiscal and Monetary Policy Transmission Framework

  Compare the transmission effects of fiscal resource execution and monetary easing on real economic activity.

  Fiscal analysis focuses on the decline in fiscal deposits, use of bond proceeds, and project starts, while monetary analysis focuses on whether rate cuts, loan growth, and aggregate social financing can translate into private demand.

Asset mapping & comparison

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

• China Macroeconomy

  Core research subject

  Strengths

  Exports, high-tech production, and equipment manufacturing remain resilient, and fiscal policy still has room for subsequent support.

  Weaknesses

  Consumption, real estate, fixed asset investment, and private credit demand are weak, and the structure of economic recovery is uneven.

  Comparison

  Supply-side performance is stronger than domestic demand absorption, and external demand support is stronger than domestic demand.

  Risks

  Fiscal execution falls short of expectations, weakening soft indicators are confirmed by hard data, and trade barriers rise further.

• China Real Estate

  Main drag on growth

  Strengths

  The report does not provide clear evidence of fundamental improvement.

  Weaknesses

  The housing downturn is structural, weighing on fixed asset investment, housing-related consumption, and households’ long-term borrowing.

  Comparison

  Performance is weaker than high-tech manufacturing, equipment manufacturing, and export-related sectors.

  Risks

  Investment continues to contract, inventory and price pressures persist, and household confidence is further weakened.

• China High-Tech and Artificial Intelligence Supply Chain

  Support item for production and trade

  Strengths

  Exports of AI-related products and supply chain imports remain active, and high-tech manufacturing supports industrial production.

  Weaknesses

  Growth is relatively dependent on external demand and may not necessarily translate into a broad recovery in domestic consumption and private investment.

  Comparison

  More resilient than traditional domestic-demand sectors, real estate, and general manufacturing.

  Risks

  Tariffs, trade defense measures, transshipment scrutiny, and a cooling of global technology trade.

• China Interest Rates and Credit

  Indicator of policy transmission and demand temperature

  Strengths

  The policy stance remains moderately accommodative, with the possibility of a 10-basis-point rate cut in the latter part of the second half.

  Weaknesses

  Lower financing costs have not yet clearly translated into private demand, and loan growth remains low.

  Comparison

  Fiscal execution is expected to have a stronger effect on near-term real growth than modest monetary easing.

  Risks

  Households’ and corporates’ willingness to borrow remains persistently weak, obstructing monetary policy transmission.

Key data

• Second-quarter GDPSeasonally adjusted annualized quarter-on-quarter 2.4%, year-on-year 4.3%Shows that after weakness from April to May, the June rebound was insufficient to reverse the quarterly slowdown.
• 2026 full-year GDP forecastAbout 4.6%Based on the baseline scenario of faster fiscal execution, export resilience, and continued AI-related external demand.
• Third- and fourth-quarter GDP forecastsSeasonally adjusted annualized quarter-on-quarter growth of 4.3% and 4.9%, respectivelyThe growth rebound depends on fiscal resources being converted into actual activity.
• July export forecastYear-on-year 24.0%, seasonally adjusted month-on-month -2.8%Exports are expected to remain resilient, but month-on-month momentum is expected to fall from June.
• July import forecastYear-on-year 30.1%, seasonally adjusted month-on-month 0.2%The AI supply chain and improved oil imports support production, but this does not yet prove a broad recovery in domestic demand.
• July industrial production forecastYear-on-year 5.0%, seasonally adjusted month-on-month 0.1%High-tech, equipment manufacturing, and export-related sectors provide support.
• July retail sales forecastYear-on-year 1.5%, seasonally adjusted month-on-month 0.2%Fading subsidy effects and weak consumer confidence constrain growth.
• July fixed asset investment forecastYear-on-year -9.0%Real estate investment remains under pressure, and infrastructure performance depends on fiscal execution.
• July inflation forecastCPI year-on-year 0.8%, PPI year-on-year 4.1%Lower energy and food prices depress CPI, while reflation remains constrained by inventory and margin pressures.
• July credit and aggregate social financing forecastNew loans of RMB 81.0 billion, aggregate social financing increase of RMB 1.274 trillionThe pullback in new loans mainly reflects seasonality, while private financing demand remains weak; year-on-year growth in aggregate social financing is expected to remain at 7.4%.

Impact & implications

The growth structure continues to tilt toward exports and advanced manufacturing, implying relative advantages for high-tech, equipment manufacturing, and the AI supply chain, while real estate, housing-related consumption, and areas dependent on household leverage still face pressure. If fiscal bond proceeds are accelerated into project starts and infrastructure spending, the economy may gradually stabilize in the second half; if fiscal execution remains slow or trade barriers escalate, growth, corporate pricing power, and private credit demand may weaken further. Monetary easing can reduce financing costs, but when confidence and effective demand are insufficient, its standalone stimulus effect is limited.

Risks

• Fiscal funding deployment and bond-funded project starts remain slow, preventing infrastructure investment from stabilizing in time.
• July hard data confirm the renewed weakening of economic momentum indicated by the PMI.
• The real estate downturn further drags on investment, consumption, household credit, and market confidence.
• The United States and other economies raise tariffs or strengthen trade defense and transshipment scrutiny, weakening export resilience.
• Consumption falls back after the subsidy effect fades and lacks support from stable income growth.
• Inventory and margin pressures limit corporate pricing power, making the reflation process weaker than expected.
• A modest rate cut only has a signaling effect and fails to effectively boost private financing demand.

What to watch

• The pace of decline in fiscal deposits and the actual use progress of approved fiscal resources
• Project starts and infrastructure spending corresponding to local government bond proceeds
• July industrial production, retail sales, and fixed asset investment data
• Household medium- and long-term loans and corporate private credit demand
• Real estate investment, construction activity, inventory, and price changes
• Export orders, tariff policies, trade defense measures, and transshipment scrutiny
• Exports of AI-related products and supply chain imports
• Inventory, corporate margins, and reflation signals from CPI and PPI