China's growth momentum slowed and financial conditions tightened in July, while policy eased slightly

Overview

The report uses a set of Goldman Sachs proprietary indicators to assess China's economy across dimensions including real activity, domestic demand, investment, inventories, trade, financial conditions, credit, foreign exchange flows, fiscal policy, and real estate policy. Its overall conclusion is that growth momentum weakened and financial conditions tightened in July, while policy indicators eased slightly, with faster government bond issuance potentially providing some support going forward.

Core views

First, real economic activity cooled markedly in July. Goldman Sachs' China Current Activity Indicator fell to a seasonally adjusted annualized month-over-month rate of +3.9%, down from +5.2% in June; the components show that the slowdown was driven mainly by manufacturing and consumption. The import-implied real domestic demand indicator likewise pointed to weaker domestic demand growth in July, while the manufacturing growth proxy and construction growth proxy both edged lower. The 21-day moving average of the MAP surprise index, which measures economic data performance relative to market consensus expectations, shows that recent macro data have generally fallen short of market expectations. Investment and inventories moved in different directions. The preliminary investment tracker based on real value-added terms points to broadly flat investment growth in the third quarter. The indicator combines seven series covering commodity demand and output, equipment sales, construction output, and newly commenced contracts. Its first principal component explains 62% of the total variation across the seven series and is then mapped to gross fixed capital formation. Meanwhile, the inventory tracker shows that inventory levels rose in the second quarter of 2026, while the boost from inventory changes to quarter-over-quarter GDP growth also strengthened. The inventory indicator combines six series covering commodities, PMI components, finished goods inventories at industrial enterprises, and automobile inventories. Its first principal component explains 25% of total variation and is converted into an inventory change indicator as a share of GDP. On trade, Goldman Sachs cross-checks Chinese customs data using “mirror” statistics reported by major trading partners. In June 2026, the externally inferred export growth indicator was generally consistent with official export growth, but the externally inferred import growth indicator was below official import growth. Because the available data are incomplete, the import data from countries used for the June export estimate covered only 31.1% of China's 2025 exports, while the export data from countries used for the import estimate covered 65.5% of China's 2025 imports. Financial conditions tightened in July. The Goldman Sachs China Financial Conditions Index incorporates AA-rated medium-term note yields, three-month SHIBOR, M2, total social financing flows, stock market price-to-earnings ratios, and the trade-weighted renminbi. Its changes can be attributed to four channels: foreign exchange, equities, credit, and interest rates. The report notes that the tightening in July was driven mainly by the renminbi's appreciation against a trade-weighted currency basket. Meanwhile, weak credit growth pushed Goldman Sachs' estimated credit impulse into negative territory in 2026; this estimate assumes that credit issuance remains unchanged for the rest of the year, so the subsequent path of credit expansion will directly affect the assessment. Goldman Sachs' preferred foreign exchange flow indicator also showed that foreign exchange inflows declined in July. This indicator combines the State Administration of Foreign Exchange's monthly net foreign exchange settlement and sales data with net cross-border renminbi flows. Policy signals improved slightly, but fiscal execution remained weak. The domestic macro policy proxy, which combines fiscal, monetary, credit, and housing policies, eased modestly in July, driven primarily by improved credit growth. However, the augmented fiscal deficit calculated on a 12-month moving-average basis continued to narrow. This measure includes both the effective on-budget deficit and off-budget spending funded through channels such as new local government special-purpose bonds, land sale revenue, local government financing vehicle bonds, policy bank support, and shadow bank lending. The fiscal “expenditure conversion ratio” declined in July, indicating that the extent to which funds raised through government revenue and bond issuance were converted into actual expenditure weakened. Looking ahead, the report expects net government bond issuance to accelerate over the coming months. Its financing tracker measures monthly net issuance of central government general bonds, central government special bonds, local government general bonds, and local government special-purpose bonds. It estimates issuance schedules for the remaining months of the year based on full-year issuance quotas, the fiscal policy stance, and seasonal patterns; local government refinancing bonds used for debt resolution are excluded. The report also notes that the issuance path may change in response to new data and policy signals. Regarding real estate policy, a relative tightness indicator covering more than 100 cities shows that housing policies continue to ease. The indicator measures the policy stance across demand-side dimensions such as home purchase eligibility, mortgage rates, down-payment requirements, and resale restrictions; supply-side dimensions such as price caps, presale restrictions, and land transaction taxes; and measures concerning speculation controls and land supply. Overall, economic growth and financing conditions were weak in July, while policy easing, faster government bond issuance, and looser housing policies constituted the main offsetting forces.

Analysis framework

The report first uses the current activity indicator and indicators for manufacturing, consumption, construction, and import-implied domestic demand to assess current and sequential economic momentum, and then uses the MAP surprise index to measure actual data strength relative to market expectations. It subsequently constructs investment and inventory trackers using principal component analysis and cross-checks official import and export data with trading partners' mirror statistics. The financial section uses a composite financial conditions index to decompose the foreign exchange, equity, credit, and interest rate channels, while combining the credit impulse and cross-border foreign exchange flows to assess growth transmission. Finally, the report uses a policy proxy, the augmented fiscal deficit, the fiscal expenditure conversion ratio, government bond issuance plans, and a city-level real estate policy index to assess policy strength and its future path.

Methodology notes

• (Out-of-Vocabulary Method)

  First Principal Component Method for the Current Activity Indicator

  Extracts common movements from multiple real activity indicators, including industrial production, electricity consumption, and the PMI, and converts them into GDP-equivalent terms to measure sequential economic momentum and the contributions of components such as manufacturing and consumption.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Industry Chain Transmission

  Import-Implied Real Domestic Demand

  Uses China's input-output tables to allocate imports by industry to their sources of final demand, and cross-checks the results against national accounts domestic demand, calculated as GDP less net exports, to assess changes in domestic demand.

• Event-Driven Strategy and Behavioral FinanceExpectation Gap/Expectation Management

  MAP Macroeconomic Data Surprise Index

  Aggregates data surprises according to the importance of economic indicators and the extent of their deviations from consensus expectations, and uses cumulative measures or moving averages over a given period to assess whether macro data are generally above or below market expectations.

• (Out-of-Vocabulary Method)

  Median Growth Proxies for Manufacturing and Construction

  The construction indicator takes the median year-over-year growth rate of housing starts and steel, cement, and glass production; the manufacturing indicator takes the median year-over-year growth rate of metal-cutting machine tools, automobiles, power-generating equipment, and microcomputer production, reducing the impact of fluctuations in individual series.

• (Out-of-Vocabulary Method)

  Principal Component and GFCF Mapping for the Investment Tracker

  Extracts the first principal component, which explains 62% of the total variation in seven investment-related series, and then maps it to gross fixed capital formation to measure investment growth in real value-added terms.

• Cycle and Business Conditions FrameworkInventory cycle (Kitchin)

  Inventory Change Tracker

  Combines six inventory-related indicators to extract the first principal component, which explains 25% of total variation, and maps it into a share of GDP to track inventory levels and the contribution of inventory changes to quarter-over-quarter GDP growth.

• (Out-of-Vocabulary Method)

  Externally Inferred Trade Mirror Statistics

  Uses import and export data published by major trading partners and country-specific lead-lag relationships to infer China's import and export growth, thereby cross-checking Chinese customs data.

• (Out-of-Vocabulary Method)

  China Financial Conditions Index and Channel Attribution

  Aggregates financing costs, monetary and credit quantities, equity valuations, and the trade-weighted renminbi exchange rate into a financial conditions index, and decomposes month-over-month changes into four channels: foreign exchange, equities, credit, and interest rates.

• Macroeconomic frameworkCredit/debt cycle

  Credit Impulse and Its Growth Impact

  Measures the boost or drag from credit conditions on future economic growth through changes in credit expansion; the report's full-year estimate assumes that credit issuance remains unchanged for the rest of the year.

• Event-Driven Strategy and Behavioral FinanceFund Flow/Positioning Analysis

  Composite Foreign Exchange Flow Indicator

  Combines the State Administration of Foreign Exchange's monthly net foreign exchange settlement and sales data with net cross-border renminbi flows to track changes in foreign exchange inflows or outflows.

• (Out-of-Vocabulary Method)

  Domestic Macroeconomic Policy Proxy

  Aggregates China's domestic macro policy stance across fiscal, monetary, credit, and housing policies to assess whether overall policy is easing or tightening.

• (Out-of-Vocabulary Method)

  Augmented Fiscal Deficit and Fiscal Expenditure Conversion Ratio

  The augmented fiscal deficit adds the effective on-budget deficit to the off-budget deficit supported by major quasi-fiscal financing channels; the expenditure conversion ratio combines government revenue, net government bond issuance, and changes in fiscal deposits to measure the extent to which financing is converted into actual expenditure.

• Event-Driven Strategy and Behavioral FinanceEvent-driven analysis

  Monthly Government Bond Issuance Path Forecast

  Forecasts net issuance schedules for various central and local government bonds during the remaining months of the year based on full-year issuance quotas, the fiscal policy stance, and seasonal patterns, with adjustments made in response to new data and policy signals.

• Event-Driven Strategy and Behavioral FinanceEvent-driven analysis

  City-Level Real Estate Policy Relative Tightness Index

  Comprehensively tracks home purchases, credit, resale restrictions, sale prices, presales, land taxes and fees, speculation restrictions, and land supply policies across more than 100 cities to assess relative changes in the housing policy stance.

Key data

• China Current Activity IndicatorJuly +3.9%, June +5.2%Seasonally adjusted annualized month-over-month rate; growth momentum slowed in July from June.
• MAP Surprise Index21-day moving average below market expectationsRecent macro data have, on average, fallen short of consensus expectations.
• Third-Quarter Investment GrowthBroadly flatAssessment based on the preliminary investment tracker's real value-added measure.
• Investment Principal Component Explanatory Power62%Share of the total variation in the seven investment series explained by the first principal component.
• Inventory Principal Component Explanatory Power25%Share of the total variation in the six inventory series explained by the first principal component.
• Inventory ChangeInventory levels rose in the second quarter of 2026The boost from inventory changes to quarter-over-quarter GDP growth strengthened.
• Coverage of Externally Inferred Export Estimate31.1%The share of China's 2025 exports represented by countries with available import data, used to estimate exports in June 2026.
• Coverage of Externally Inferred Import Estimate65.5%The share of China's 2025 imports represented by countries with available export data, used to estimate imports in June 2026.
• China Financial Conditions IndexTightened in JulyDriven mainly by the renminbi's appreciation against a trade-weighted currency basket.
• Credit ImpulseTurned negative in 2026Due to weak credit growth; the estimate assumes that credit issuance remains unchanged for the rest of the year.
• Domestic Macroeconomic Policy ProxyEased slightly in JulyDriven primarily by improved credit growth.
• Augmented Fiscal DeficitNarrowed further in JulyCalculated on a 12-month moving-average basis.
• Fiscal Expenditure Conversion RatioDeclined in JulyReflects a weakening in the extent to which funds raised through government revenue and bond issuance were converted into actual expenditure.
• Real Estate Policy CoverageMore than 100 citiesThe relative tightness indicator shows that housing policies continue to ease.

Impact & implications

The report argues that simultaneous weakness in manufacturing, consumption, construction, and domestic demand in July, together with tighter financial conditions and a negative credit impulse, indicates pressure on the near-term growth environment. Inventory accumulation in the second quarter strengthened its contribution to quarter-over-quarter GDP growth, but the third-quarter investment indicator points only to broadly flat growth. Slight easing in the policy proxy, continued relaxation of housing policies, and faster government bond issuance over the coming months may provide an economic offset. However, the decline in the fiscal expenditure conversion ratio means that whether financing can be converted into actual expenditure in a timely manner remains critical.

Risks

• The monthly net government bond issuance forecast may change further in response to new data and policy signals.

What to watch

• Watch whether net government bond issuance accelerates over the coming months as the report expects, and whether the funds raised can be converted into actual fiscal expenditure.
• Watch whether credit issuance remains unchanged for the rest of the year, as this assumption directly affects estimates of the credit impulse and its impact on growth.
• Watch whether housing-related activity changes following continued easing of city-level real estate policies.