Goldman Sachs: Exports and technology support China growth, but domestic demand, property and employment remain key drags

Overview

This report is an in-depth study of China’s macroeconomy and technology-industry transition. Goldman Sachs argues that China’s economy is showing a more pronounced structural split: exports, industrial production and technology-related investment remain resilient, while domestic demand indicators such as real estate, consumption, domestic auto sales and infrastructure are weak. The report links short-term economic momentum with long-term strategic transition, emphasizing that technology and AI are China’s long-term policy direction, but if cyclical policy is insufficient and employment and income come under pressure, domestic demand could weaken and, in turn, undermine the sustainability of the technology-driven growth model.

Core views

The core views are: first, the April and May economic data were weak, so Q2 real GDP growth needs to be revised down, but a rebound in QoQ growth in Q3 is possible under assumptions of lower oil prices, faster fiscal spending and normalizing weather. Second, the Chinese government is pushing the economy away from property dependence toward technology, with industrial robots, semiconductors, high-tech manufacturing and AI computing-power investment becoming structural bright spots. Third, China’s AI investment should not be judged only by the capex of large internet companies; government-led computing networks and lower data center construction costs are also important sources. Fourth, cyclical policy cannot be replaced by long-term planning alone; if employment, income, consumption and confidence remain weak, AI-driven productivity gains will be hard to convert into stronger domestic demand.

Analysis framework

The report combines macro data tracking, policy-signal interpretation, industry output comparisons, capital-market performance comparisons, and a U.S.-China comparison of AI capex and data center capacity. The analysis starts from May activity data, decomposes the divergence between exports and domestic demand, and then adjusts quarterly GDP forecasts; it then uses industrial output, sector investment, equity-market sector indices, data center capacity and government policy documents to support the long-term direction of the technology transition and its potential impact on employment, property and consumption.

Methodology notes

• Macro ForecastingReal GDP QoQ annualized and y/y forecast adjustment

  Adjust the quarterly GDP path based on April and May real activity data while keeping the full-year forecast unchanged.

  Goldman Sachs lowers its Q2 2026 real GDP annualized quarter-on-quarter forecast from 4.0% to 3.5%, and its y/y forecast from 4.7% to 4.5%; under assumptions of lower oil prices, faster fiscal spending and normalizing weather, it raises its Q3 annualized quarter-on-quarter forecast from 4.5% to 5.0%, while keeping the full-year real GDP forecast at 4.7%.

• Structural Divergence AnalysisExport vs domestic demand divergence framework

  Use export contribution and domestic demand indicators to break down growth quality.

  The report estimates that strong exports contributed about 3 percentage points to real GDP y/y growth, while recent domestic demand grew only about 1%-2% y/y; auto data also show the split, with domestic auto sales down 22% y/y in May and auto exports up 75% y/y.

• Industrial Transition AnalysisTechnology-driven transition framework

  Observe structural shifts in high-tech manufacturing, AI computing power, semiconductors and industrial robots relative to the property chain.

  The report notes that, versus 2019, industrial robot output is now about three times higher and semiconductor output has more than doubled, while output of building materials such as glass and cement has declined; in equities, a surge in the information technology sector and declines in discretionary consumer stocks reflect the same divergence.

• Policy Transmission AnalysisLong-term strategy and cyclical policy linkage framework

  Assess how short-term policy affects long-term technology transition goals.

  The report argues that long-term planning helps the economy respond to external shocks, but cyclical variables such as employment, income, consumption and confidence determine whether the transition path is smooth; if policy tightens and loosens frequently from quarter to quarter, confidence recovery may be hurt.

Asset mapping & comparison

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

• China macroeconomy

  Research theme and forecast target

  Strengths

  Strong exports and still-supportive industrial production, with the full-year real GDP forecast maintained at 4.7%.

  Weaknesses

  Weak domestic demand, with retail sales, fixed-asset investment, property and domestic auto sales all under pressure.

  Comparison

  Compared with the official Q1 5.0% y/y real GDP growth, April and May production data point to about 4% y/y growth.

  Risks

  If employment, income and confidence continue to weaken, domestic demand could further drag on growth.

• China technology and AI compute chain

  Long-term policy support direction and structural growth theme

  Strengths

  High-tech manufacturing value added, information transmission industry investment, semiconductor and industrial robot output are strong, and the government is planning computing-network investment.

  Weaknesses

  Large internet companies' capex remains smaller than that of U.S. peers, and commercialization and labor-market impacts remain uncertain.

  Comparison

  2026 capex by major U.S. cloud providers is expected to exceed $750 billion, while Alibaba, Tencent, ByteDance and Baidu together are around $100 billion in China, but China's installed data center capacity is about 60% of the U.S.'s.

  Risks

  If AI applications rapidly replace labor, they could intensify pressure on employment and consumption.

• Real estate and consumption chain

  Main manifestation of weak domestic demand

  Strengths

  After several years of adjustment, house prices may be close to a bottom in the next one to two years.

  Weaknesses

  Consumption, rents, house prices and household confidence remain affected by pressure on employment and income.

  Comparison

  Technology-related output and investment are rising, while physical output in the property chain such as glass and cement is declining.

  Risks

  If AI replacement of jobs causes incomes to stagnate or fall, rents and house prices may remain under pressure, delaying recovery in property and consumption.

• Export and auto export chain

  Key source of current growth resilience

  Strengths

  Exports in nominal U.S. dollar terms were up nearly 20% y/y, and auto exports rose 75% y/y in May.

  Weaknesses

  Strong exports mask weak domestic demand; if policymakers focus only on the headline GDP target, efforts to expand domestic demand may be limited.

  Comparison

  May domestic auto sales fell 22% y/y, sharply contrasting with 75% y/y export growth.

  Risks

  External demand, trade frictions or currency changes could weaken the export contribution.

• China equity market sector allocation

  Capital market reflection of structural divergence

  Strengths

  The information technology sector index has risen more than 50% year to date, supported by expectations for the technology transition.

  Weaknesses

  The discretionary consumer sector index has fallen more than 25%, showing weak market confidence in consumption recovery.

  Comparison

  The Shanghai Composite is roughly flat overall, but sector performance within the market is highly divergent.

  Risks

  If policy support is not sustained or technology growth fails to lift employment and domestic demand, the relative advantage of technology may become volatile.

Key data

• 2026 full-year real GDP forecast4.7%Goldman keeps the full-year forecast unchanged.
• 2026 Q2 real GDP QoQ annualized forecast3.5%Cut from 4.0% previously; the y/y forecast was lowered from 4.7% to 4.5%.
• 2026 Q3 real GDP QoQ annualized forecast5.0%Raised from 4.5% previously, assuming lower oil prices, faster fiscal spending and normalizing weather.
• Contribution of exports to real GDP y/y growthabout 3 percentage pointsThis implies recent domestic demand growth of only about 1%-2% y/y.
• May retail salesdown 0.6% y/yReflects weak domestic consumption.
• Fixed-asset investment for Jan-Maydown 4.1% y/yTurned negative alongside retail sales, a rare occurrence in official release history.
• May domestic auto sales and exportsDomestic sales down 22% y/y, exports up 75% y/yShows a clear divergence between domestic and external demand.
• May value added in high-tech manufacturingup 15.1% y/yWell above overall industrial value added growth of 4.5%.
• Information transmission industry investmentup 30.4% y/yThis industry includes AI computing-power related investment.
• China installed data center capacityabout 60% of the U.S.As of mid-2025, the report argues that China's computing buildout cannot be measured solely by large internet companies' capex.
• 15th Five-Year Plan computing-network investmentRMB 2 trillionPlanned spending for 2026-2030, including data centers.
• 2026 Brent oil price forecast adjustmentcut from $90/barrel to $80/barrelDownward revision by Goldman Sachs' commodities team, helping reduce the drag from energy prices on economic activity.

Impact & implications

For investment and macro judgment, the report sends the signal that “the aggregate growth target may still be achieved, but the quality of growth is becoming more polarized.” The export chain, high-tech manufacturing, semiconductors, AI computing power and data center construction remain the main lines of policy support and structural growth; however, pressure on property, consumption, domestic auto sales and employment means that domestic demand recovery is still unstable. If fiscal and employment support does not keep pace, the technology transition may face demand shortfalls and social stability pressure. In equities, the structural advantage of technology over consumer and property-related chains may continue, but too-rapid AI replacement of labor, repeated policy swings, and external trade and energy shocks are the main risks.

Risks

• If AI applications replace labor too quickly, they could intensify employment pressure and weigh on income, rents, house prices and consumption.
• Domestic demand growth is only about 1%-2%; without sufficient fiscal and employment policy support, the economic recovery may remain unstable.
• Frequent policy swings between tightening and loosening from quarter to quarter may hinder confidence recovery among households and businesses.
• Strong exports may make the overall GDP target appear achievable, thereby reducing the urgency of policies to expand domestic demand.
• Energy prices, extreme weather and external trade frictions could still disrupt short-term economic activity.
• If the property market is hit by employment and income shocks, the timing of a bottom may be pushed back.

What to watch

• Whether fiscal spending and local government special bond issuance accelerate materially.
• Whether weather normalizes in Q3 and industrial production receives seasonal support toward quarter-end.
• Whether employment, youth unemployment and hiring data for entry-level white-collar jobs worsen.
• Whether retail sales, domestic auto sales, rents and house prices show signs of stabilization.
• Whether high-tech manufacturing, information transmission investment, semiconductor output and industrial robot output can sustain high growth.
• The rollout pace of 15th Five-Year Plan computing-network and data center investment.
• Whether policy goals broaden from a single headline GDP growth target to employment, consumption and domestic demand indicators.