Goldman Sachs says China's growth weakened from weak to weaker in July, with insufficient demand making short-term support policies unlikely to generate lasting momentum

Overview

This report discusses the reasons behind the renewed weakening in China's July activity data, the potential short-term support from policy, and its limitations. Goldman Sachs believes weakness has spread from an already low growth base to previously relatively resilient services consumption, with domestic demand and private-sector financial pressure at the core; although the government is still likely to meet its annual growth target, sustained growth requires stronger demand-side support and reforms.

Core views

Goldman Sachs notes that China's July activity data weakened from June and came in below already subdued market expectations. Industrial value added still rose 4.5% year-on-year, mainly supported by strong exports; however, retail sales increased only 0.6% year-on-year, while fixed-asset investment fell 6.7% year-on-year in the first seven months, implying a double-digit year-on-year decline in July. Construction remained in contraction, and high-frequency indicators showed no clear rebound, so industrial value added and the services output index together point to official real GDP growth of around 4% year-on-year at the start of Q3. Following weaker data and the central bank's mid-month liquidity injection through overnight reverse repos, expectations for monetary easing rose. The 10-year China government bond yield fell below 1.70%, down more than 10 basis points from late February, reflecting the market's view that energy-driven inflation is temporary, growth headwinds remain strong, and policy easing is needed. The report attributes current weakness to insufficient demand. Weekly steel data show that steel output fell in July and early August; meanwhile, prices of rebar, which is mainly used in construction, have also declined in recent months. Simultaneous declines in output and prices indicate weak demand, rather than supply constraints that would be reflected in rising prices. Earlier "anti-involution" actions had driven meaningful price increases in industries such as steel and polysilicon over several months, but without solid demand support—and given the difficulty of substantially cutting supply due to employment stability considerations—prices ultimately fell back to, or even below, pre-action levels. Goldman Sachs believes the July slowdown is more concerning than that in April. Over the past year, industrial value added and the National Bureau of Statistics manufacturing PMI have often strengthened in quarter-end months such as March, June, and September, then weakened month-on-month in April, July, and October; the report believes this may be related to front-loaded production before quarter-end to support production-side GDP readings. The April slowdown followed 5.0% year-on-year real GDP growth in Q1, at the upper end of the 4.5% to 5% full-year target range; in contrast, the July slowdown followed growth of only 4.3% in Q2, already below the lower bound of that range. More importantly, previously relatively strong services retail growth fell to Goldman Sachs' estimated 3.2% year-on-year in July, while goods sales will also face waning consumer trade-in stimulus, putting pressure on the household consumption outlook. Severe weather continued into August and may persist through year-end due to El Niño effects. In a political transition year, insufficient incentives for local governments and more anti-corruption investigations have also slowed government bond issuance; between June and July, the declines in year-on-year growth rates for infrastructure investment and cement output were particularly pronounced. The report further explains the recurring weakness through insufficient private-sector deleveraging and the policy mix. Despite the easing package introduced in September 2024 and the RMB10 trillion debt-resolution plan approved in November 2024, support over recent years has remained below the scale of the shocks. By comparison, after peaking in Q4 2007, the U.S. private non-financial sector debt service ratio declined by more than 4 percentage points over the following seven years, aided by substantial Federal Reserve rate cuts and debt restructuring; China's equivalent measure, after initially peaking in Q3 2020 following the introduction of the "three red lines" policy, rose by nearly 2 percentage points from Q1 2022 to Q4 2025. Against the backdrop of pandemic lockdowns and a severe property downturn, households and businesses have had to devote a larger share of income to debt service, suppressing purchasing power and confidence and making the economy more vulnerable to pronounced weakness when it encounters headwinds. Goldman Sachs also believes policy has been focused almost entirely on technological innovation and high-end manufacturing, without sufficiently translating into broad-based employment and income growth. Before the pandemic, the employment component of the non-manufacturing PMI was significantly stronger than that of manufacturing; after the pandemic, this relationship reversed. High-end manufacturing and technological breakthroughs have enhanced manufacturing competitiveness and export resilience, but manufacturing accounts for only around 20% of China's total employment and cannot offset weak non-manufacturing employment, making it insufficient to create a sustainable domestic-demand cycle. Regarding the policy outlook, Goldman Sachs still believes that, absent an unusual external shock, the government will seek to achieve at least 4.5% official real GDP growth this year and meet the full-year target. The July Politburo meeting shifted to a more accommodative stance and called for stronger countercyclical adjustment. The report identifies four possible measures during the year: accelerating government bond issuance and launching the RMB800 billion new policy financing tool for 2026, directed toward the "six networks" and major projects under the 15th Five-Year Plan; supporting large industries with long supply chains, while property remains in destocking and auto and home-appliance sales have already been front-loaded by trade-in programs, making electronic equipment, machinery, and semiconductors more likely to receive support for expanded production; relaxing housing provident fund usage rules, though the impact on property is expected to be only marginal; and promoting consumption in lower-tier cities and rural areas, although existing measures mainly renovate commercial facilities and increase the supply of high-quality, high-priced goods, and simply increasing supply is unlikely to meaningfully raise total consumption without increasing incomes. The report's key reservation is that even if these measures help achieve the annual growth target, they remain primarily supply-side oriented: they can raise output and production-side GDP readings in the short term, but may subsequently create excess supply, deflation, and more debt. Policy effectiveness may also be weakened by the implementation of safety and public-security measures; for example, after a coal mine accident in Shanxi in May, national coal output fell 12%, a magnitude close to that during nationwide pandemic lockdowns in January and February 2020. Goldman Sachs believes that if demand-side stimulus and fundamental reforms to unlock domestic demand continue to fall short, cautious and intermittent policy responses will leave households, private enterprises, and local governments under sustained financial pressure, creating a risk that cyclical weakness turns into structural stagnation.

Analysis framework

The report first assesses growth momentum using July industrial, consumption, investment, construction, and high-frequency data, then uses changes in steel output and prices to distinguish demand weakness from supply constraints. It subsequently compares the growth base and consumption performance in April and July, and combines weather, local incentives, and government bond issuance to explain the drags. Finally, it evaluates short-term growth stabilization capacity and medium- to long-term domestic-demand constraints through a comparison of China-U.S. private-sector debt service ratios, changes in the employment structure, and the specific allocation of policy tools.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Identifying demand-led weakness through simultaneous declines in steel output and steel prices

  The report argues that simultaneous declines in volumes and prices usually indicate insufficient demand; this assessment is used to show that the economic slowdown is not primarily caused by supply contraction.

• Macroeconomic frameworkCredit/debt cycle

  Comparison of private non-financial sector debt service ratios

  The report uses the debt service ratio to measure the share of income devoted to debt repayment and compares post-crisis changes in China and the United States to explain how financial pressure suppresses consumption, confidence, and growth resilience.

Asset mapping & comparison

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

• 10-year China government bond

  Weaker growth data and rising easing expectations drive yields lower

  Strengths

  The yield fell below 1.70%, reflecting the market's view that growth headwinds are strong and policy easing is necessary.

  Comparison

  In contrast to the sharp rise in 10-year government bond yields in other countries since late February.

  Risks

  The report does not quantify the subsequent impact on yields if growth or policy expectations change.

Key data

• Estimated official real GDP growth at the start of Q3around 4% year-on-yearGoldman Sachs estimate based on July industrial value added, the services output index, construction, and high-frequency data
• Q2 real GDP growth4.3% year-on-yearBelow the lower bound of the government's 4.5% to 5% full-year target range
• July industrial value added4.5% year-on-yearSupported by strong exports
• July retail sales0.6% year-on-yearWeak growth
• Fixed-asset investment in the first seven months of this year-6.7% year-on-yearThe report says this implies a double-digit year-on-year decline in July
• July services retail growth3.2% year-on-yearGoldman Sachs estimate; it had remained above 5% earlier in the year
• 10-year China government bond yieldbelow 1.70%Down more than 10 basis points from late February
• China private non-financial sector debt service ratiorose by nearly 2 percentage points from Q1 2022 to Q4 2025Used by the report to illustrate the increased financial burden on the private sector
• New policy financing toolRMB800 billionAllocated for 2026 and unused as of mid-August
• Change in coal output-12%The decline following the Shanxi coal mine accident in May

Impact & implications

The report believes that accelerated fiscal financing, project investment, and support for certain industries can help official GDP achieve its target during the year, but supply-oriented measures alone cannot create a virtuous cycle of consumption, employment, and income. If demand stimulus and related reforms are inadequate, short-term support may come at the cost of overcapacity, deflation, and debt accumulation, increasing the risk of impaired growth potential.

Risks

• If an unusual external shock occurs, the expectation that the government will achieve the annual growth target may not materialize.
• The actual effectiveness of existing measures remains to be seen, and supply-side policies may create excess supply, deflation, and increased debt.
• If safety and public-security measures are implemented aggressively, they may weaken the transmission of accommodative policies to economic activity.
• A persistent lack of demand-side stimulus and reforms to unlock domestic demand could cause cyclical weakness to evolve into structural stagnation.

What to watch

• Watch whether the government accelerates the use of remaining government bond issuance quotas and launches the RMB800 billion new policy financing tool.
• Watch whether policymakers introduce additional easing measures in October after the release of Q3 real GDP data.
• Watch services consumption, consumption performance after trade-in effects fade, and infrastructure investment and construction-related indicators.
• Watch the implementation effects of housing provident fund adjustments, consumption-promotion policies for lower-tier cities and rural areas, and support measures for electronic equipment, machinery, and semiconductors.
• Watch the effects of weather, local-government incentives, anti-corruption investigations, and safety measures on economic activity and policy transmission.