Local clients have turned more cautious on China's growth momentum, while expectations for policy easing remain low

Overview

This report summarizes Goldman Sachs' key observations from client meetings in Beijing and Shanghai over the past week. Affected by weaker economic activity data in April-May, diverging growth drivers, and weak domestic demand, local clients have become more cautious on China's short-term macro outlook. Discussions focused on expectations for policy easing, consumer confidence and the labor market, constraints on local investment execution, new cross-border investment rules, and the outlook for AI capital spending.

Core views

The core views are as follows: First, China's growth is becoming more unbalanced. Exports still support aggregate activity, but have not effectively improved employment and profits, while weak domestic demand has raised concerns that year-on-year GDP growth could fall below 4.5% in the coming quarters. Second, expectations for policy support are low. Investors believe that once the annual growth target is understood as a 4.5%-5.0% range, policymakers have more room to wait until downside risks worsen before acting. Third, the consumption recovery continues to be dragged down by labor market pressure and the negative wealth effect from property. Fourth, fiscal funds are not scarce, but local government incentives and execution constraints may limit the implementation of investment. Fifth, cross-border investment rules are viewed more as tighter policy scrutiny rather than a broad tightening of capital controls. Sixth, the AI theme continues to dominate market attention, especially U.S. cloud providers' 2Q capital spending.

Analysis framework

The report is based on meetings with onshore clients in Beijing and Shanghai, covering local investors such as mutual funds, private equity institutions, banks, and insurance asset managers. It combines client feedback with recent economic data, policy signals, and market strategy views to form a qualitative judgment on China's macro growth, policy, and asset implications.

Methodology notes

• Macro researchLocal client meeting feedback

  Observe changes in macro expectations through feedback from onshore investors

  The report is not a model forecast or deep single-stock analysis, but instead uses Goldman Sachs' interactions with local clients to capture marginal market views on growth, policy, consumption, capital flows, and the AI theme.

• Macro policy analysisGrowth momentum and policy reaction function

  Assess whether policy support will be proactively intensified or reactively deployed

  Clients generally believe that with exports still supporting aggregate activity and the growth target range leaving some buffer, policy may only become more visibly supportive if downside risks worsen further.

Asset mapping & comparison

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

• China macro growth

  Core research subject of the report

  Strengths

  Exports still support aggregate activity, and lower oil prices may provide short-term support to exports and industrial production.

  Weaknesses

  Domestic demand is weakening, with insufficient transmission to employment and profits, making the growth structure more fragmented.

  Comparison

  Compared with two months ago, local clients are more cautious about short-term growth momentum.

  Risks

  If policy easing is not sufficiently visible, GDP growth could fall below 4.5% over the next few quarters.

• H-share market

  Equity asset affected by China's growth and policy expectations

  Strengths

  If policy or AI sentiment improves, risk appetite may find support.

  Weaknesses

  Low expectations for demand-side stimulus and insufficient confidence in macro growth.

  Comparison

  The report says that with almost no expectation of strong demand-side stimulus, a reversal in the H-share broad market is challenging.

  Risks

  Policy coming in below expectations, continued weak consumption, and tighter implementation of capital flow rules.

• China consumer-related assets

  Affected by household confidence, employment, and wealth effects

  Strengths

  At the policy level, greater attention has begun to be paid to household balance sheet repair and the wealth effect channel.

  Weaknesses

  Retail sales weakened in May, the labor market remains under pressure, and the negative wealth effect from property is weighing on consumer confidence.

  Comparison

  Compared with earlier, client concerns about the timing of a consumption recovery have risen.

  Risks

  AI replacing entry-level jobs, internet company downsizing, and falling asset prices may create a negative feedback loop.

• China AI-related companies

  Affected by the global AI capital spending cycle

  Strengths

  Investor attention is high, and strong capital spending plans from U.S. cloud providers could support earnings and cash flow expectations.

  Weaknesses

  The outlook for related companies is highly dependent on the pace of overseas cloud providers' capital spending.

  Comparison

  AI is one of the most closely watched themes in the meetings, with significantly more attention than ordinary demand-side stimulus.

  Risks

  U.S. cloud providers' 2Q capital spending coming in below expectations could weigh on global market sentiment and valuations of related Chinese companies.

Key data

• April-May real export year-on-year growth4.5%Below the 15.2% year-on-year growth in the first quarter, indicating a marginal cooling in the contribution from external demand.
• First-quarter real export year-on-year growth15.2%Exports were strong in the first quarter and were an important support for earlier aggregate growth.
• Concern about potential GDP growthBelow 4.5% year-on-yearSome investors worry that without more visible policy easing, GDP growth could fall below this level in the coming quarters.
• May nominal retail sales year-on-year-0.6%The weakest reading since December 2022, intensifying market concerns about the timing of a consumption recovery.
• Unused government bond quota as of end-MayRMB 7.7 trillionShows ample fiscal funding capacity, but whether it can be converted into investment depends on local execution incentives.
• New policy bank financing tools in 2026RMB 800 billionCould support fiscal policy and investment in the second half of the year.
• Year-on-year increase in fiscal depositsRMB 536 billionReflects continued room in available fiscal resources.
• Key AI observation indicatorU.S. cloud providers' 2Q capital spending plansThe report believes this indicator will affect global market sentiment and directly influence earnings growth and cash flow expectations for related Chinese companies.

Impact & implications

The implication for asset allocation is that China macro trades lack support from strong demand-side stimulus in the short term, making a reversal in the H-share broad market more difficult. Investment opportunities may be more concentrated in structural sectors driven by expectations for AI capital spending, while consumption, the property chain, and areas dependent on local investment execution still face confidence and implementation risks. If cross-border investment rule enforcement turns conservative, it may create short-term disruption for legitimate outbound investment and overseas asset allocation.

Risks

• Policy support remains reactive and fails to offset weakening domestic demand in a timely manner.
• Export support weakens at the margin, and improving external demand does not translate into employment and profits.
• The negative wealth effect from the property downturn continues to suppress household consumption confidence.
• AI applications intensify labor market pressure, especially affecting entry-level white-collar jobs.
• Local government fiscal constraints and insufficient incentives lead to slow approval and execution of investment projects.
• New cross-border investment rules may be implemented conservatively at the local level, creating short-term disruption for legitimate outbound investment and overseas asset allocation.
• If U.S. cloud providers' 2Q capital spending falls short of expectations, AI-related assets and global risk appetite may come under pressure.

What to watch

• Whether the July Politburo meeting merely accelerates existing policy tools or releases a stronger demand-side stimulus signal.
• Whether subsequent economic activity data after April-May continues to show weak domestic demand and diverging growth.
• Whether retail sales, employment, and household confidence data can confirm a consumption recovery.
• Whether unused government bond quotas, policy bank tools, and fiscal deposits can be converted into actual project implementation.
• The detailed individual rules, approval speed, and local implementation standards of the new cross-border investment rules.
• U.S. cloud providers' 2Q capital spending plans and their impact on earnings and cash flow expectations for China's AI industry chain.
• Whether the H-share market can gain new catalysts from policy, earnings, or AI-driven risk appetite.