Goldman Sachs: Weak Domestic Demand in May, Accelerating Renminbi Internationalization, Household Asset De-risking from Real Estate

Overview

This research report issued by Goldman Sachs' macro team outlines three key observations regarding recent developments in China's macroeconomic landscape. First, May's economic data reveals persistent weakness in domestic demand, with retail sales seeing their first annual decline outside the pandemic era, while exports remain strong, indicating a clear economic divergence. Second, signals released at the Lujiazui Forum point to a transition in monetary policy frameworks and accelerated progress in renminbi internationalization, including a narrowed interest rate corridor and new offshore renminbi instruments. Lastly, the report delves into the structural changes within Chinese household balance sheets, noting that amidst a downturn in real estate, there is a noticeable shift of household wealth from properties towards equity and insurance products.

Core views

The performance on the domestic front has been disappointing, exacerbating economic disparities. In May, industrial output rose 4.5%, slightly above expectations, but both retail sales and fixed-asset investments underperformed. Retail sales fell by 0.6% compared to last year, which marks the first time since the COVID-19 pandemic that such a drop occurred outside of lockdown periods. Fixed-asset investment saw another sharp contraction after being lackluster in April. Meanwhile, earlier published data shows that exports grew by 19.4% in May, indicating a distinct feature in today’s Chinese economy where 'strong exports meet weak domestic demand'. Accelerated Transition of Monetary Policy Framework and RMB Internationalization. At this year's Shanghai Lujiazui Forum, People's Bank of China Governor Pan Gongsheng announced that the overnight reverse repo rate corridor would be narrowed from 70 basis points to 50 basis points, representing another step towards a more price-oriented monetary policy framework. Additionally, a series of new initiatives suggest that RMB internationalization is speeding up, including establishing a Foreign and International Monetary Authorities (FIMA) Renminbi Repo Facility for foreign official institutions, upcoming launches of five-year Chinese government bond futures in Hong Kong, and setting up an offshore RMB trading mechanism in Shanghai. Reconstruction of Household Balance Sheets: Shifting from Real Estate to Financial Assets. Given the severe downturn in the real estate market, the condition of China's household balance sheet holds special macro significance. According to the dataset compiled by Goldman Sachs, as of Q1 2026, real estate and cash/deposits respectively accounted for 52% and 25% of total household assets. Looking ahead, it is anticipated that shares held in equities and insurance within total household assets will significantly expand, while those dedicated to real estate will continue to shrink, signifying a major structural shift in household wealth allocation.

Analysis framework

The report combines high-frequency data tracking with policy event analysis. Firstly, it identifies trends in internal and external demand differentiation through dissection of May's macro data (industrial production, retail sales, investment, and exports), thus gauging short-term economic momentum. Secondly, it focuses on policy statements from the Lujiazui Forum, interpreting the market-oriented transformation of the monetary policy framework and capital account opening process through adjustments in the interest rate corridor width and introduction of new financial instruments. Finally, using a long-term structural perspective ('China in the Long Run' series), it constructs a dataset of household balance sheets to quantify the path of structural migration in household wealth allocation during the downward cycle of real estate, thereby uncovering insights into future shifts in consumption potential and financial market demands.

Methodology notes

• Macroeconomic framework

  Price-Based Monetary Policy Framework

  Refers to central banks guiding market interest rates primarily by adjusting short-term policy rates and the breadth of their corridors instead of mainly relying on quantity-based tools such as reserve requirements. The report judges that China's move towards narrowing the repo rate corridor indicates a trend toward finer-grained and market-oriented policies.

• Corporate Fundamental and Financial Framework

  Household Balance Sheet Analysis

  Analyzing the structure of assets (such as real estate, deposits, stocks) and liabilities of a nation or sector as a whole. This approach helps reveal the macro trend of shifting wealth from physical assets to financial assets during the downturn of the real estate sector, which is crucial for understanding future capital market funding flows.

• Industry/Industrial Analysis FrameworkSupply and Demand Framework

  Analysis of Internal and External Demand Divergence

  Assessing the sources of economic growth by comparing the performance of exports (external demand) against retail sales and investments (internal demand). The report notes that China's current economic situation reflects an imbalance characterized by strong external demand and weak internal demand, suggesting that policies might need greater focus on stimulating domestic demand.

Key data

• Year-on-Year Change in Industrial Output in May4.5%Slightly higher than market expectations, indicating relatively stable production activities
• Year-on-Year Change in Retail Sales in May-0.6%First negative growth since the pandemic lockdown period, reflecting sluggish consumer demand
• Year-on-Year Growth Rate of Exports in May19.4%Maintains robust growth, supporting overall economic performance
• Width of Overnight Reverse Repo Rate Corridor50bpNarrowed from 70bp, demonstrating the transformation of the monetary policy framework
• Proportion of Households' Total Assets Allocated to Real Estate in Q1 202652%Still the largest asset category, but its share is expected to continue shrinking
• Proportion of Cash/Deposits in Households' Total Assets in Q1 202625%Second-largest asset category, indicating continued preference for liquidity

Impact & implications

The report suggests that ongoing weakness in domestic demand may prompt policymakers to introduce further stimulus measures, whereas the refinement of monetary policy could enhance transmission efficiency. The improvement of renminbi internationalization facilities will deepen and attract more participants to offshore markets, benefiting cross-border financial services. The long-term shift of residents' assets from real estate to financial assets will provide sustained incremental funds support for stock markets, bond markets, and the insurance industry, altering the investor composition and asset pricing logic of China's capital markets.

Risks

• Underperformance of domestic demand recovery dragging down overall economic growth
• Adjustment amplitude of the real estate market exceeding expectations affecting the wealth effect on residents
• Slowing export growth due to changes in global trade environment

What to watch

• Subsequent month's repair status of retail sales and fixed-asset investment
• Specific operational effects of the central bank's price-based monetary policy tools and further evolution of the interest rate corridor
• Actual pace of change in the proportion of equity and insurance within resident asset allocation
• Scale and market response to offshore renminbi trading mechanisms and FIMA repo facilities