Weaker Credit Structure and Resilient External Surplus May Leave China's Economic Activity Soft in the Third Quarter

Overview

This report summarizes three key themes from Goldman Sachs' recent China macro research: the diminished contribution of bank lending to total social financing, the continued strength of the current account surplus, and the potential for softer economic activity at the start of the third quarter.

Core views

July aggregate credit outperformed expectations, mainly driven by increased government and corporate bond issuance, while net new bank loans declined. Externally, the current account surplus remained elevated in the second quarter; the report views moderate RMB appreciation and stronger domestic demand as necessary steps toward rebalancing. On growth, industrial production, retail sales, and fixed-asset investment all face deceleration or continued weakness, while weather disruptions may also temporarily weigh on port and offline activity.

Analysis framework

The report tracks and assesses China's credit structure, external imbalances, and near-term growth momentum using July credit data, second-quarter balance-of-payments data, forecasts for upcoming monthly activity data, and high-frequency indicators.

Methodology notes

• Macroeconomic AnalysisTotal Social Financing and Credit Structure Tracking

  Compare outstanding total social financing, bank loan growth, and the composition of new financing

  Used to determine whether improving aggregate financing is driven mainly by bond financing rather than expanding bank credit.

• Balance of Payments AnalysisCurrent Account as a Share of GDP

  Measure the extent of external imbalances using the current account surplus as a share of GDP

  Used to assess the implications of the external sector for growth and exchange-rate policy.

• High-Frequency and Forecast AnalysisMonthly Activity Tracking

  Combine forecasts for industrial production, retail sales, and investment with high-frequency disruption data

  Used to assess the direction of short-term economic activity and temporary shocks such as weather.

Asset mapping & comparison

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

• RMB

  Related to the elevated current account surplus and external rebalancing agenda

  Strengths

  A strong external surplus provides a fundamental basis for RMB appreciation.

  Weaknesses

  Weak domestic demand constrains progress in internal rebalancing.

  Comparison

  The report believes RMB appreciation and stronger domestic demand should proceed together, rather than relying on a single policy alone.

  Risks

  Global rebalancing objectives may not necessarily be achieved through these measures alone.

• China Bond Market

  Government and corporate bond issuance was the main driver of the July improvement in total social financing

  Strengths

  Increased bond financing supports aggregate total social financing performance.

  Weaknesses

  Slower bank loan growth indicates weak traditional credit transmission.

  Comparison

  The importance of bond financing has increased, while the share of bank loans in new total social financing has declined significantly.

  Risks

  If financing demand in the real economy remains inadequate, expanded bond financing may not translate into stronger economic activity.

• China Consumption-Related Assets

  Retail sales growth is expected to remain low in the second half of the year

  Strengths

  Policy may still provide some support.

  Weaknesses

  Average retail sales growth in the second half of 2026 is expected to be only 1.7% year-on-year.

  Comparison

  Industrial production, retail sales, and investment all point to weak growth momentum.

  Risks

  Weaker policy support and weather disruptions could further suppress short-term consumption activity.

Key data

• July year-on-year growth in outstanding total social financing7.4%Year-on-year bank loan growth was 5.2%.
• Share of bank loans in new total social financingapproximately one-thirdHistorically, it was typically around two-thirds.
• Second-quarter current account surplus as a share of GDP3.7%It was 3.8% in the first quarter and 1 percentage point higher than in the second quarter of 2025.
• Forecast for July industrial production growth4.6% year-on-yearIt was 5.3% year-on-year in June.
• Forecast for July retail sales growth1.5% year-on-yearExpected to remain subdued.
• Forecast for fixed-asset investment growth-5.8% year-to-date year-on-yearExpected to remain subdued.
• Forecast for average retail sales growth in the second half of 20261.7% year-on-yearGrowth may remain low after policy support weakens.

Impact & implications

For macro policy, weak bank credit and soft domestic demand may reinforce the need to stabilize growth and support domestic demand; for markets, bond financing replacing bank lending reflects a shift in financing structure, while the elevated external surplus increases the importance of discussions around RMB strength and external rebalancing.

Risks

• Persistently weak bank lending could undermine the recovery in domestic demand and investment.
• Subdued retail sales and fixed-asset investment could increase downward pressure on growth.
• Weather events such as typhoons and heavy rainfall could disrupt ports and offline economic activity.
• The elevated external surplus could heighten uncertainty around rebalancing and exchange-rate policy.

What to watch

• Actual releases of July industrial production, retail sales, and fixed-asset investment data.
• Whether government and corporate bond issuance can continue to support total social financing and whether bank lending stabilizes.
• RMB exchange-rate movements and the degree of policy support for domestic demand.
• The duration of weather-related disruptions to port logistics, production, and consumption.