Weak Domestic Demand Shows No Sign of Reversal; Stronger Policy Support May Provide a Floor in Q4

Overview

The report believes that China's domestic demand lost further momentum in July. Although exports remain resilient, they are increasingly unable to offset broad weakness in consumption, real estate, and investment. Barclays maintains its 2026 GDP growth forecast at 4.5%, below market consensus, and judges that risks are tilted to the downside if quasi-fiscal support is delayed.

Core views

Consumption and real estate together account for approximately 70% of GDP and are the two key variables determining the growth path. A weaker labor market, expanding flexible employment, household deleveraging, and the negative wealth effect from real estate will continue to suppress consumption; real estate investment, starts, sales, and home prices all remain weak, and the market has not yet bottomed. Meanwhile, special local government bonds, policy financial instruments, and the “Two Major” and “Two New” policies following the Politburo meeting are expected to accelerate infrastructure spending, with more visible support for growth expected in the fourth quarter. High-tech and green industries remain relatively strong, but their resilience is insufficient to fully offset the downturn in traditional sectors.

Analysis framework

Based on high-frequency macroeconomic data on July real activity, inflation, credit, employment, real estate, and sector output, combined with quarterly growth forecasts and policy implementation progress, the report assesses the marginal impact of domestic demand, external demand, and fiscal infrastructure spending on growth.

Methodology notes

• Macroeconomic AnalysisDemand and Supply Comparative Analysis

  Compare changes in demand indicators such as consumption and fixed-asset investment with supply and external-demand indicators such as industrial production and exports.

  The report notes that external demand and high-tech supply remain resilient, but weakening on the demand side is more pronounced, and external demand cannot fully offset domestic economic weakness.

• Macroeconomic AnalysisGrowth Forecast and Consensus Comparison

  Compare the institution's growth forecast with market consensus and the quarterly trajectory.

  Barclays maintains its forecast of 4.5% GDP growth in 2026, below the Bloomberg consensus of 4.6%, and expects weak momentum in the third quarter followed by modest improvement in the fourth quarter as policy stimulus takes effect.

• Policy Transmission AnalysisFiscal and Infrastructure Multiplier Monitoring

  Assess the transmission of fiscal support into physical workload through special local government bonds, policy financial instruments, project pipelines, and the pace of fund deployment.

  The report focuses on local special bond issuance, CNY800bn in policy financial instruments, and local project preparation to determine the timing of an acceleration in infrastructure investment.

Asset mapping & comparison

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

• China Macroeconomy

  Weak domestic demand is driving the near-term growth slowdown, while fiscal infrastructure support provides a subsequent stabilizing force.

  Strengths

  Exports remain resilient, high-tech manufacturing and green industries are growing rapidly, and policy objectives remain focused on stabilizing growth.

  Weaknesses

  Consumption, real estate, and fixed-asset investment are weakening simultaneously, while the labor market and household balance sheets are under pressure.

  Comparison

  Supply-side and external-demand performance is relatively better than demand-side performance, but cannot fully offset weakening domestic demand.

  Risks

  Delays in quasi-fiscal support, continued labor-market deterioration, and a deepening negative wealth effect from real estate.

• China Real Estate

  Real estate is a core drag on domestic demand and household confidence.

  Strengths

  New home prices in first-tier cities were flat in July after a series of modest increases.

  Weaknesses

  Investment, sales, starts, construction, completions, and home prices are all in deep contraction or decline.

  Comparison

  Real estate's direct share of GDP has fallen from approximately 25% in 2021 to approximately 13% in 2025, but indirect spillover effects remain significant.

  Risks

  Real estate investment is expected to decline by around 20% in 2026, while the negative wealth effect continues to suppress consumption and employment expectations.

• Infrastructure Investment

  The main transmission channel for policy support to stabilize growth.

  Strengths

  Special local government bond issuance is accelerating, CNY800bn in policy financial instruments has broadened its support scope and is providing interest subsidies for the first time, and local project pipelines are expanding.

  Weaknesses

  Infrastructure investment declined 14.7% year-on-year in July, and near-term physical investment remains weak.

  Comparison

  Expectations for policy support have strengthened, but current infrastructure activity remains weaker than market expectations following policy announcements.

  Risks

  The pace of project approvals, fund disbursement, and conversion into physical workload may be delayed.

• High-Tech Manufacturing

  A relatively strong sector in the economic structural transition, supported by credit and investment.

  Strengths

  Output of industrial robots, new energy vehicles, and semiconductors is growing rapidly; loans to high-tech industries rose 14.6% year-on-year.

  Weaknesses

  The scale and transmission capacity of the high-tech sector are still insufficient to offset broad weakness in traditional industries, real estate, and consumption.

  Comparison

  It is significantly outperforming overall industrial production and traditional manufacturing investment.

  Risks

  Weaker external demand, fluctuations in the industrial investment cycle, and an expanding contraction in traditional sectors.

Key data

• 2026 GDP Growth Forecast4.5%Below the Bloomberg consensus of 4.6%.
• Third-Quarter GDP Growth Forecast4.3% YoYBelow the Bloomberg consensus of 4.6%.
• July Retail Sales Growth0.6% YoY1.0% in June, below the market consensus of 1.5%.
• 2026 Retail Sales Growth Forecastapproximately 1%3.7% in 2025.
• Fixed-Asset Investment Growth in the First Seven Months-6.7% YoY-5.7% in the first half of the year.
• July Fixed-Asset Investment Growth-12.8% YoYThe third consecutive month of double-digit year-on-year decline.
• 2026 Real Estate Investment Forecastapproximately -20% YoYExpected to be only 45% of the 2021 peak.
• July Real Estate Investment Growth-27.4% YoY-24.4% in June.
• July Industrial Value-Added Growth4.5% YoY5.3% in June.
• July High-Tech Product Output GrowthIndustrial robots 30.2%, new energy vehicles 29.9%, semiconductors 20.7%High-tech manufacturing continued to significantly outperform overall industrial production.

Impact & implications

Domestic demand remains the primary constraint on macroeconomic growth, with weak consumption and real estate lowering the growth trend and increasing reliance on policy. Faster policy implementation can provide a floor for fourth-quarter activity, with infrastructure, digital infrastructure, energy, and strategic projects likely to benefit first; however, downside risks to growth will rise further if fiscal fund deployment and project starts fall short of expectations. High-tech and green manufacturing, along with related credit extension, retain relative advantages, reflecting the continued reallocation of economic resources from real estate and traditional industries toward strategic sectors.

Risks

• Delays in additional fiscal or quasi-fiscal support could cause growth to fall below the 4.5% forecast.
• Continued labor-market weakening and expanding flexible employment could undermine household income stability and consumer confidence.
• A worse-than-expected real estate downturn could deepen the negative wealth effect and weigh on related investment and consumption.
• Weaker external demand could prevent exports from continuing to cushion soft domestic demand.
• Slower-than-expected use of funds, approvals, or construction starts for infrastructure projects could weaken the policy stabilization effect.

What to watch

• The issuance and use of special local government bonds, as well as project implementation of the CNY800bn policy financial instruments.
• Marginal changes in third- and fourth-quarter GDP, retail sales, and fixed-asset investment.
• Changes in employment, household deleveraging, and the number of flexible workers.
• Real estate sales, starts, construction, completions, and home-price trends across first-, second-, and third-tier cities.
• The impact of the “Two Major” and “Two New” policies on equipment upgrades, consumer trade-ins, and physical investment.
• Whether high-tech manufacturing output, credit, and investment can continue to maintain relatively rapid growth.