China's growth momentum weakened, with production stabilizing but the drag from domestic demand intensifying

Overview

This report evaluates China's 2Q 2026 and June economic data. The core conclusion is that short-term stabilization in activity has reduced the risk of a sharp downturn, but the growth structure has become narrower and more uneven. Production, exports, equipment manufacturing, and high-tech manufacturing remain resilient, while real estate, fixed asset investment, private investment, and household consumption continue to drag on domestic absorption.

Core views

JPMorgan believes that China's economy is showing a 'two-speed' pattern: the production side is supported by external demand, trade rerouting, the AI/electronics cycle, and policy support, but transmission to employment, income, and household demand remains limited. Policy focus needs to shift from supply-side support to converting fiscal resources into genuine domestic demand. Even if fiscal execution may accelerate in the second half, the report still lowers its full-year real GDP forecast to 4.6%, indicating that the base case is stabilization through policy support rather than a broad recovery.

Analysis framework

The report mainly uses high-frequency and quarterly indicators such as GDP, industrial production, fixed asset investment, real estate investment, retail sales, services retail sales, imports and exports, and policy language to break down production-side resilience, weak domestic demand, and policy transmission efficiency, while also assessing the second-half growth path in light of external trade frictions, geopolitical risks, and domestic fiscal multiplier constraints.

Methodology notes

• Macro Growth DecompositionProduction-Demand-Policy Transmission Framework

  Breaks economic momentum into production, external demand, investment, consumption, and policy execution.

  The report does not equate the June stabilization in activity with a full recovery. Instead, it judges that support comes from the production side, backed by external demand and policy support, while domestic demand absorption remains insufficient. Therefore, it is necessary to observe whether fiscal funds can be translated into projects, employment, income, and consumption.

Asset mapping & comparison

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

• China Macro Assets

  Overall growth expectations were downgraded, but policy support has strengthened

  Strengths

  External demand, industrial upgrading, and fiscal support can still cushion the downside.

  Weaknesses

  Domestic absorption remains weak, and growth support is too narrow.

  Comparison

  Compared with 1Q, 2Q growth slowed noticeably and q/q momentum weakened.

  Risks

  If policy funds cannot be effectively converted into demand, inventory, price competition, and deflationary pressure may rise.

• Real Estate Chain

  Main drag

  Strengths

  Policy direction focuses on ensuring project delivery, reducing inventory, urban renewal, and restoring buyer confidence.

  Weaknesses

  Real estate investment fell 18.0% y/y in 1H, and housing-related consumption remains weak.

  Comparison

  Compared with high-tech manufacturing and services, real estate recovery is clearly lagging.

  Risks

  Housing prices and weak sales confidence may continue to weigh on household balance sheets and local government finances.

• Industry and High-Tech Manufacturing

  Main support for production stabilization

  Strengths

  Equipment manufacturing, high-tech manufacturing, and AI/electronics-related exports performed strongly.

  Weaknesses

  Spillover to employment, income, and household consumption is limited.

  Comparison

  Significantly stronger than traditional manufacturing, real estate, and private investment.

  Risks

  If domestic demand is insufficient, production resilience may turn into inventory, margin pressure, and price competition.

• Consumption and Services

  Limited buffer

  Strengths

  Services retail sales and online sales are more resilient than goods retail sales.

  Weaknesses

  Retail sales grew only 1.3% in 1H, while autos, the fading trade-in policy boost, and housing-related categories remained weak.

  Comparison

  Consumption improvement is weaker than the stabilization on the production side.

  Risks

  Weak income expectations and confidence may undermine the implementation of the consumption expansion plan.

Key data

• 2Q Real GDP4.3%oyaBelow 1Q's 5.0%, and also below JPM's forecast of 4.7% and the market consensus of 4.5%.
• 2Q Annualized q/q GDP2.4%q/q saarBelow JPM's forecast of 3.3%, indicating weakening cyclical momentum.
• 2026 Full-Year Real GDP Forecast4.6%y/yLowered from 4.7%, reflecting weak domestic demand and a more challenging external environment.
• 3Q/4Q Annualized q/q Forecast4.3%/4.9%q/q saarRaised from 3.5% and 3.7%, respectively, based on assumptions of faster fiscal delivery and possible off-budget support.
• June Industrial Value-Added5.3%oyaAbove May's 4.5%, with equipment manufacturing and high-tech manufacturing performing strongly.
• 1H Equipment Manufacturing and High-Tech Manufacturing9.3% / 13.3%Significantly outperformed overall industry and manufacturing, serving as the main source of production stabilization.
• June Fixed Asset Investment-10.0%oyaInvestment remained the main drag on growth.
• 1H Real Estate Fixed Asset Investment-18.0%ytdThe real estate adjustment continues to suppress investment and related consumption.
• June Retail Sales1.0%oya，CNY 4.27trnImproved from -0.6% in May, but with limited buffering effect.
• 1H Retail Sales1.3%oya，CNY 24.9trnServices retail sales grew 5.3%, while goods retail sales rose only 1.1%.
• June Goods Trade24.2%oyaExports grew 20.8% and imports rose 29.4%; trade is a buffer rather than a standalone growth engine.
• Five-Year Consumption Expansion Plan TargetAbout CNY 60trn in retail sales by 2030Raised from CNY 50.1trn in 2025, but the report believes implementation details and targeted fiscal deployment remain insufficient.

Impact & implications

The implication for asset and policy views is that short-term stabilization in production should not be interpreted as the formation of an endogenous recovery. External demand, the AI/electronics cycle, and industrial upgrading continue to support the production chain, but weakness in real estate, private investment, and household consumption will limit transmission to earnings, prices, and employment. The speed of fiscal policy execution and the direction of fund allocation will be key to whether growth can be maintained in the 4.5–5.0% target range in the second half.

Risks

• Tensions in the Middle East are pushing up energy, shipping, and commodity costs.
• The US is rebuilding tariff barriers through Section 301/232 tools and sector restrictions.
• Europe is increasing pressure around EVs, batteries, solar PV, and subsidies.
• Weak real estate, cautious corporates, and local government constraints are reducing the fiscal multiplier.
• If production resilience cannot transmit to demand, it may lead to inventory buildup, price competition, margin pressure, and deflation.

What to watch

• Whether the July Politburo meeting strengthens faster fiscal deployment, domestic demand support, and efforts to stabilize employment and expectations.
• Whether special bonds, policy banks, and central government financing are truly flowing into effective projects.
• The intensity of real estate policy execution in ensuring project delivery, reducing inventory, urban renewal, and restoring buyer confidence.
• Whether retail sales, services consumption, and household income show sustained improvement.
• The net impact of external demand, the AI/electronics cycle, and trade frictions on exports and industrial production.