Goldman Sachs China Economic Proprietary Indicators: June activity momentum improved, but domestic demand, investment, and policy conditions remain tight

Overview

This report updates Goldman Sachs' proprietary China economic indicators, covering multiple dimensions including China's Current Activity Indicator, domestic demand, macro data surprise index, manufacturing and construction proxy indicators, investment, inventories, imports and exports, financial conditions, FX flows, macro policy, fiscal policy, and real estate policy. The overall conclusion is that economic activity momentum improved in June versus May, but domestic demand, investment, and credit conditions in the second quarter still showed pressure, with policy conditions—especially on the fiscal side—remaining tight.

Core views

First, China's CAI rose to +5.3% mom annualized sa in June, indicating improved short-term activity momentum, with the improvement mainly coming from manufacturing and consumption. Second, both the import-implied domestic demand proxy and the investment tracker suggest weak growth in the second quarter, indicating that the recovery in aggregate demand is uneven. Third, the Financial Conditions Index tightened in June, and credit impulse turned negative due to weak credit growth, which may weigh on subsequent GDP growth. Fourth, FX flow indicators show continued FX inflows in June, but macro policy proxy indicators tightened further, mainly due to tighter fiscal policy. Fifth, the fiscal spending pass-through rate rose in June, and net government bond issuance is expected to accelerate in the coming months, which may become a key policy point to watch.

Analysis framework

The report uses a set of Goldman Sachs proprietary macro proxy indicators to cross-validate the state of China's economy across dimensions such as real activity, demand, investment, inventories, trade, financial conditions, FX flows, and policy stance. Methodologically, it employs frameworks including principal component analysis, mirror trade statistics, input-output table mapping, financial conditions decomposition, fiscal gap estimation, and city-level policy tightness indices to convert public data and high-frequency indicators into judgments on macro momentum.

Methodology notes

• Economic activity indicatorChina Current Activity Indicator

  CAI / GSCNCAI

  CAI is the first principal component of multiple real activity indicators, including industrial production, electricity consumption, PMI, etc., and is expressed in GDP-equivalent units; it can also be reclassified into sequential momentum in manufacturing, consumption, and other sectors.

• Domestic demand estimationImport-implied real domestic demand

  Import-implied real domestic demand

  This method uses China's input-output tables to allocate China's imports across sources of final demand in order to infer domestic demand, and cross-validates the results against GDP excluding net exports in the national accounts framework.

• Surprise indicatorChina MAP surprise index

  Macro data surprise index

  This indicator aggregates the importance and magnitude of economic data relative to market consensus expectations to assess whether macro data overall are coming in above or below market expectations over a period of time.

• Production and construction proxy indicatorsManufacturing growth proxy and construction growth proxy

  Manufacturing and construction growth proxy indicators

  The construction growth proxy indicator is the median YoY growth rate of housing starts and steel, cement, and glass output; the manufacturing growth proxy indicator is the median YoY growth rate of metal-cutting machine tools, automobiles, power generation equipment, and microcomputer output.

• Investment trackingInvestment tracker

  Investment tracker on a real value-added basis

  The investment tracker is based on seven underlying investment indicators, including commodity demand and output, equipment sales, construction output, and new construction contracts; after cleaning, the first principal component is extracted and mapped to gross fixed capital formation.

• Financial conditionsGS China Financial Conditions Index

  GSFCI

  GSFCI measures liquidity conditions through variables including funding rates, AA MTN yields, 3-month SHIBOR, M2 and TSF flows, stock market P/E ratios, and the trade-weighted RMB, and can be decomposed into four channels: FX, equities, credit, and rates.

Asset mapping & comparison

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

• China macro risk assets

  Improving economic activity is supportive of risk appetite, but weak financial conditions and credit impulse are constraints.

  Strengths

  Improving CAI, rising contributions from manufacturing and consumption, and macro data on average above expectations.

  Weaknesses

  Weak domestic demand and investment in the second quarter, negative credit impulse, and tightening policy proxy indicators.

  Comparison

  Short-term activity indicators are stronger than some demand and financial condition indicators, showing that the economic recovery is uneven.

  Risks

  If credit growth remains weak or fiscal spending fails to keep pace with bond issuance, growth momentum may fall back.

• RMB and FX flows

  FX inflows and trade-weighted RMB appreciation affect financial conditions.

  Strengths

  Goldman Sachs' preferred FX flow indicator shows continued inflows in June.

  Weaknesses

  RMB appreciation against the trade-weighted basket is the main driver of tighter financial conditions.

  Comparison

  FX inflows improve external balance signals, but currency appreciation may also create tightening effects through the financial conditions channel.

  Risks

  External demand, cross-border capital flows, and exchange rate volatility may alter the direction of financial conditions.

• China rates and credit markets

  The Financial Conditions Index, credit impulse, and the pace of government bond issuance directly affect the rates and credit environment.

  Strengths

  Net government bond issuance is expected to accelerate, which may provide support through fiscal fund deployment.

  Weaknesses

  Weak credit growth has pushed credit impulse negative, and financial conditions tightened in June.

  Comparison

  Fiscal bond supply may rise, but credit expansion momentum remains weak.

  Risks

  Accelerating bond supply, shifts in the fiscal pace, and insufficient credit demand may jointly affect yields and credit spreads.

• China real estate-related assets

  The city-level real estate policy relative tightness index shows housing policy continued to ease.

  Strengths

  Policy easing helps alleviate pressure in the housing market.

  Weaknesses

  Other CAI components include housing and the labor market, and the report does not show a clear improvement in real estate fundamentals yet.

  Comparison

  Policy conditions are easing at the margin, but demand and investment indicators remain weak.

  Risks

  If household home-buying demand and developer investment do not recover, the transmission of policy easing to actual activity may be limited.

Key data

• China CAI+5.3% mom annualized saJune reading, above +4.2% in May.
• Drivers of CAI improvementManufacturing and consumptionThe report states that the June CAI improvement was driven by manufacturing and consumption.
• Domestic demand conditionStill weak in the second quarterThe import-implied domestic demand proxy indicates that domestic demand growth remained weak in the second quarter.
• Manufacturing and construction proxy indicatorsBoth edged up in JuneGoldman Sachs' manufacturing growth proxy and construction growth proxy both improved in June.
• Investment trackerWeaker growth in the second quarterThe preliminary investment tracker, measured on a real value-added basis, points to weak investment growth in the second quarter.
• Inventory trackingInventory levels may rise in Q2 2026The contribution of inventory changes to quarter-on-quarter GDP growth may increase in the second quarter.
• Financial Conditions IndexTightened in JuneThe tightening was mainly driven by RMB appreciation against the trade-weighted basket.
• Credit impulseTurned negative this yearThe report estimates that credit impulse turned negative due to weak credit growth and assumes credit supply remains steady for the rest of the year.
• FX flowsContinued inflows in JuneGoldman Sachs' preferred FX flow indicator shows continued FX inflows in June.
• Macro policy proxy indicatorsTightened further in JuneThe tightening was mainly driven by tighter fiscal policy.
• Fiscal spending pass-through rateRose in JuneThis indicator measures the extent to which funds raised through government revenue and bond issuance are actually deployed by policymakers.
• Net government bond issuanceExpected to accelerate in coming monthsThe report expects the pace of net government bond issuance to speed up in the later months of the year.

Impact & implications

For investors, the macro implication of this report is that China's short-term economic activity has improved, but the quality of the recovery remains uneven. Improvements in manufacturing and consumption support short-term growth momentum, but weak domestic demand, investment, and credit impulse mean sustainability still needs to be monitored. Tightening financial conditions and tight fiscal policy proxy indicators may limit valuation expansion in risk assets; if government bond issuance accelerates and drives fiscal spending implementation, it could become an important support for stabilizing growth going forward. Continued easing in real estate policy suggests policymakers are still underpinning the housing market, but the report does not provide buy or sell recommendations for any single asset or security.

Risks

• Domestic demand growth remained weak in the second quarter, which may undermine the sustainability of improved economic activity.
• The investment tracker points to weaker investment growth in the second quarter, which may weigh on fixed capital formation.
• Tighter financial conditions and a negative credit impulse may create lagged pressure on subsequent GDP growth.
• Macro policy proxy indicators tightened further, especially tighter fiscal policy, which may limit the effectiveness of growth stabilization.
• The actual impact of faster net government bond issuance depends on whether the funds are effectively translated into spending and physical workload.
• This report is macro thematic research and does not provide stock-level earnings forecasts, ratings, or target prices.

What to watch

• Whether CAI can continue to stay above 5% and whether contributions from manufacturing and consumption can be sustained.
• Whether the import-implied domestic demand proxy improves, to verify whether domestic demand stabilizes after the second quarter.
• The synchronicity among the investment tracker, inventory changes, and gross fixed capital formation.
• Marginal changes across the four GSFCI channels: FX, equities, credit, and rates.
• Whether credit impulse remains negative and whether TSF and M2 flows show signs of recovery.
• After net government bond issuance accelerates, whether the fiscal spending pass-through rate and the augmented fiscal deficit improve in tandem.
• Whether easing in city-level real estate policy can transmit to sales, housing starts, and investment data.