July data broadly undershot expectations, signaling a deepening slowdown in China’s economy

Overview

Nomura noted that China’s main economic activity indicators slowed further in July from June and generally came in below market expectations, reflecting mounting pressure from domestic demand, investment, and real estate. It therefore cut its 2026 third-quarter year-on-year GDP growth forecast from 4.5% to 4.3%, and believes still-optimistic market growth forecasts may continue to be revised down.

Core views

The slowdown in industrial production indicates that strong exports provided limited support to overall output; weak retail growth mainly reflected goods consumption and the post-scaling-back decline in trade-in policy effects; manufacturing, infrastructure, and real-estate investment all contracted more deeply, with real estate remaining the core drag. On policy, the July Politburo meeting adopted a more growth-supportive tone, but specific measures remain unclear; Nomura expects clearer policies may be introduced in September to October, with the impact primarily reflected in the fourth quarter.

Analysis framework

The report assesses the extent of real-economy slowing through year-on-year data, seasonally adjusted month-on-month data, sector breakdowns, real-estate high-frequency and price indicators, and fiscal and liquidity data, and uses this assessment to formulate a China rates relative-value trade recommendation.

Methodology notes

• Macroeconomic Fundamentals AnalysisEconomic Activity and Segment Tracking

  Assessing growth momentum through year-on-year and month-on-month changes in industrial production, retail sales, fixed-asset investment, real estate, and price indicators.

  Comparing actual data with market and Nomura forecasts, while incorporating sector breakdowns and the policy and liquidity backdrop, to identify the main drags from demand, investment, and supply.

• Fixed Income Relative-Value AnalysisDV01-Matched Trade

  Matching the interest-rate risk of swap and government-bond positions using DV01.

  Recommends shorting September 5-year NDIRS and going long 30-year Chinese government bonds at a 1:1 DV01 ratio to capture the relative performance of long-end government bonds amid weak growth and low funding costs.

Asset mapping & comparison

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

• 30-Year Chinese Government Bonds

  Benefit from weak growth, low funding costs, and expectations of potential easing

  Strengths

  Funding rates remain stable and low, spreads are still relatively wide, and the long end is supported by carry and relative value.

  Weaknesses

  The market response to weaker economic data has become muted, and room for lower rates depends on expectations for incremental policy support.

  Comparison

  More defensive than 5-year NDIRS; recommended as a DV01 1:1 pair with a short September 5-year NDIRS position.

  Risks

  Stronger-than-expected policy stimulus, faster bond supply, or tighter liquidity could push up long-end yields.

• September 5-Year NDIRS

  Recommended fixed-rate payer position, forming a relative-value trade with a long position in 30-year Chinese government bonds

  Strengths

  Can hedge part of the risk from curve and policy-expectation changes.

  Weaknesses

  The fixed-rate payer position may come under pressure if expectations of significant easing intensify.

  Comparison

  The report moves the previous September 3-year NDIRS payer position to the 5-year tenor, considering 5 years better suited to the current curve positioning.

  Risks

  More accommodative-than-expected monetary policy or a rapid decline in market rates.

Key data

• Industrial Production Growth4.5% YoY (July 2026)5.3% in June; both market and Nomura expectations were 5.0%.
• Retail Sales Growth0.6% YoY (July 2026)1.0% in June; both market and Nomura expectations were 1.5%.
• Fixed-Asset Investment Growth-12.8% YoY (July 2026)-10.0% in June; market expectation was -9.3%, and Nomura expectation was -8.2%.
• Real Estate Investment Growth-27.5% YoY (July 2026)Weaker than market expectations of -25.1% and Nomura expectations of -23.0%.
• Third-Quarter GDP Forecast4.3% YoYCut by Nomura from 4.5%.
• 30-Year Chinese Government Bond Yield2.164%Current level of 2600004 cited in the report; the strategy targets a 15bp gain by end-September.

Impact & implications

Deteriorating growth data increase the need for further policy support, though the pace of policy implementation remains uncertain. Weak fundamentals, stable-low funding rates, and expectations of potential easing favor long-duration government bonds; meanwhile, domestic demand, real estate, autos, and traditional building-material-related sectors continue to face substantial operating pressure.

Risks

• The scale, timing, and transmission effects of policy support may fall short of expectations.
• A continued property downturn could further depress consumption, investment, and local government finances.
• Weaker external demand or slower export-related production could undermine industrial growth.
• Oil and gas supply disruptions, the pace of bond supply, and liquidity changes could affect inflation and interest-rate markets.
• Monthly sector data are volatile, and one-month anomalies may not represent medium-term trends.

What to watch

• Whether clearer fiscal, property, or countercyclical policies are introduced in September to October.
• Whether third-quarter GDP forecasts and market expectations continue to be revised down.
• Actual use of government-bond issuance proceeds and improvement in infrastructure investment.
• Whether property sales, home prices, starts, and developer funding show signs of stabilization.
• Changes in funding rates, open-market operations, and 30-year Chinese government bond yields.