Weak domestic demand and slow policy implementation lead Nomura to lower China Q3 growth forecast

Overview

The report argues that after China's real GDP YoY growth slowed to 4.3% in Q2, July high-frequency indicators showed continued weakening in growth momentum. Although the Politburo meeting sent more proactive signals on stabilizing growth, subsequent ministry-level meetings lacked specific policy details, and the acceleration in government bond issuance and fiscal spending was not obvious. Based on weak domestic demand and slow policy implementation, Nomura lowered its Q3 GDP growth forecast, while expecting more specific support measures to be introduced in September to October, with their main growth effects reflected in Q4.

Core views

First, manufacturing, services and construction PMIs deteriorated simultaneously, indicating that the economic slowdown is not confined to a single sector. Second, partial stabilization in the real estate market is mainly concentrated in a few tier-1 and tier-2 cities, while sales data for lower-tier cities and top 100 developers remain clearly under pressure. Third, the front-loading effect of durable goods trade-in policies is weighing on automobile and goods consumption, and retail sales growth in 2026 is expected to decline to 2.2% from 3.7% in 2025. Fourth, fiscal policy may initially rely on faster execution of the existing budget, while incremental tools are more likely to be policy bank financing or carried-over local government bond quotas, rather than raising the budget deficit or launching a new round of large-scale debt swaps. Fifth, the probability of rate cuts this year is very low; although an RRR cut is possible, it is not the base case and is expected to have limited practical impact on credit demand and real economic growth. Sixth, policymakers may continue to curb overly rapid appreciation of the renminbi to preserve exports as an important growth pillar.

Analysis framework

The report uses high-frequency macro indicator tracking, YoY and sequential trend comparisons, city-tier breakdowns, fiscal financing progress calculations and historical policy scenario analogies to comprehensively assess Q3 growth momentum and policy room in the second half of the year. Key evidence includes official and RatingDog PMIs, housing transactions and developer sales, passenger vehicle retail sales, government bond net financing, annual quota execution progress, and growth-stabilization policy experience in the second half of 2023 to 2025.

Methodology notes

• macro forecastinghigh-frequency indicator tracking

  Using monthly and weekly data to judge the direction of quarterly economic growth in advance

  The report identifies the strength of domestic demand and policy support in July through indicators such as PMIs, housing sales, automobile retail sales and government bond financing, and adjusts the Q3 GDP forecast accordingly.

• policy analysispolicy transmission lag analysis

  Distinguishing the time gaps among policy signals, measure announcements, fund deployment and the emergence of economic effects

  The report judges that the supportive statements from the Politburo meeting will not immediately bring a significant growth rebound. Specific measures may be implemented in September to October, with the main effects expected to appear in Q4.

• scenario analysishistorical policy analogy

  Assessing potential stimulus combinations by referencing policy tools used in the second half of recent years

  Using rate cuts, RRR cuts, fiscal adjustments, policy bank financing, local government bonds and debt swap measures from 2023 to 2025 as references, the report judges that 2026 is more likely to rely on existing budgets and limited supplementary financing.

• fiscal analysisfinancing quota execution calculation

  Comparing annual government bond quotas, cumulative issuance during the year and historical levels for the same period

  Based on a full-year net financing quota of about RMB14 trillion and slow issuance in the earlier period, the report estimates that net financing from August to December may be about RMB1.3 trillion higher than the same period last year.

Asset mapping & comparison

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

• Chinese equities

  Growth and policy expectations

  Strengths

  The Politburo meeting shifted toward more support for growth, and faster subsequent fiscal fund deployment may improve Q4 earnings and market sentiment.

  Weaknesses

  Domestic demand is weak in Q3, policy measures lack details, and transmission faces lags.

  Comparison

  Policy support in Q4 is expected to be stronger than in Q3, but the scale of incremental stimulus may fall short of market expectations for large-scale easing.

  Risks

  Policies are introduced later than expected, domestic demand continues to decline, or an RRR cut only creates a signaling effect.

• Renminbi

  Growth, interest rate differentials and export policy

  Strengths

  Export growth remains strong, providing support for the economy and current account.

  Weaknesses

  Weak growth momentum, large interest rate differentials and potential capital outflows limit room for renminbi appreciation.

  Comparison

  Compared with stimulating the economy through rate cuts, policymakers are more likely to maintain exchange rate stability and avoid rapid renminbi appreciation.

  Risks

  Major external central banks raise rates, capital outflow pressure rises, or export growth suddenly declines.

• Chinese government bonds

  Fiscal issuance and monetary policy

  Strengths

  The probability of rate cuts this year is low, but weak economic conditions and potential RRR cuts still provide some support for bond demand.

  Weaknesses

  Government bond issuance may accelerate significantly from August to December, increasing supply pressure.

  Comparison

  Fiscal expansion is more likely to occur through faster execution of existing quotas, rather than a sharp increase in the deficit or a new large-scale debt swap.

  Risks

  Concentrated bond supply release, rising inflation, or further tightening by major central banks.

• Real estate and automobile-related assets

  High-frequency domestic demand indicators

  Strengths

  Housing transactions in some tier-1 and tier-2 cities are stabilizing, and existing-home transactions still maintain YoY growth.

  Weaknesses

  Sales in lower-tier cities, contracted sales of the top 100 developers and passenger vehicle retail sales have all declined significantly.

  Comparison

  Large cities are performing better than lower-tier cities, and existing-home transactions are better than new-home and developer sales.

  Risks

  The front-loading effect of trade-in policies continues, household confidence remains insufficient, and the real estate downturn spreads further.

Key data

• Q3 2026 GDP YoY growth forecast4.3%Lowered from 4.5%.
• Q4 2026 GDP YoY growth forecast4.5%Maintained unchanged.
• Full-year 2026 GDP growth forecast4.5%Maintained unchanged, as actual Q2 growth was slightly higher than the previous more cautious forecast.
• Official manufacturing PMI in July49.2It was 50.3 in June, re-entering contraction territory.
• Manufacturing new orders index in July48.5The lowest level since May 2023.
• Official services PMI in July49.0The lowest level since the pandemic.
• Construction PMI in July47.0Apart from the pandemic shock in February 2020, this was the lowest level in more than a decade.
• YoY growth in July contracted sales of top 100 developers-18.3%It was -9.6% in June, indicating further overall deterioration in the real estate market.
• YoY growth in passenger vehicle retail sales from July 1 to 26-18.0%It was -23.2% in June, and sales have posted negative growth for ten consecutive months.
• Government bond net financing in JulyRMB1.11 trillionLower than RMB1.25 trillion in the same period last year.
• Cumulative government bond net financing year-to-date through JulyRMB7.8 trillionRMB1.3 trillion less than the same period last year.
• Potential supplementary policy financingRMB200-300 billionMay be provided through policy bank financing or local government bond quotas.
• Potential RRR cut magnitude50 basis pointsPossible but not the base-case forecast, and expected to have limited impact on interest rates and credit demand.

Impact & implications

The growth forecast downgrade and weak domestic demand indicators put pressure on real estate, automobiles, discretionary consumption and traditional cyclical sectors in Chinese equities, while policy expectations may bring a temporary improvement in sentiment around September to October. Accelerated government bond issuance is expected to increase the intensity of infrastructure investment and fiscal spending, and raise liquidity demand in the banking system. Given the low probability of rate cuts and continued attention to China-foreign interest rate differentials and capital flow pressures, monetary policy offers limited direct support to risk assets. On the renminbi, the report judges that policymakers do not want it to appreciate rapidly, so as not to weaken export competitiveness; therefore, room for rapid exchange-rate strengthening may be constrained.

Risks

• Incremental growth-stabilization measures are introduced later than September to October, causing the Q4 rebound to fall short of expectations.
• Real estate weakness spreads further from lower-tier cities to large cities, with new-home and developer sales continuing to deteriorate.
• The front-loading effect of durable goods trade-in policies exceeds expectations, further slowing automobile and goods consumption.
• Government bond issuance and fiscal spending continue to fall short of annual progress, making it difficult for infrastructure investment to recover.
• Rate hikes by major external central banks widen China-foreign interest rate differentials, exacerbating capital outflows and renminbi pressure.
• Export growth falls back, weakening the current most important growth pillar and forcing policymakers to increase stimulus.
• Even if an RRR cut is implemented, insufficient effective credit demand in the real sector may limit policy effectiveness.

What to watch

• Whether official manufacturing, services and construction PMIs can rebound from August to October.
• Whether specific incremental fiscal or consumption-promotion measures are announced in September to October.
• The actual deployment progress of the RMB800 billion new policy financing tool and local government special bonds.
• Whether government bond net financing from August to December can increase by about RMB1.3 trillion compared with the same period last year.
• Sales of the top 100 developers, new-home transactions in lower-tier cities and existing-home transaction trends in large cities.
• Whether passenger vehicle retail sales can end consecutive negative growth, and whether additional funding is provided for trade-in policies.
• Whether RMB200-300 billion in policy bank financing or local government bond quotas is added.
• Whether the People's Bank of China implements a 50-basis-point RRR cut, and its actual impact on credit demand and market sentiment.
• The pace of renminbi appreciation, capital flow pressures and changes in export growth.