July data reveals a mixed picture of slowing domestic momentum tempered by resilient external demand and emerging growth engines, with counter-cyclical policy adjustments now on the horizon. On the supply side, industrial output has moderated, though high-tech manufacturing and modern services continue to exhibit robust vitality. Demand indicators show exports maintaining double-digit growth that exceeded expectations, but domestic recovery remains sluggish 鈥?goods consumption has weakened, services spending is comparatively strong, and the cumulative investment contraction has widened further. Price dynamics display mild CPI softening alongside moderating PPI momentum, while AI and high-end equipment supply chains see upward price pressure. Liquidity conditions remain ample on the financial front, yet credit demand from the real economy stays subdued, with financing gradually shifting toward direct channels.
Overall, emerging industries and external demand provide crucial support, but insufficient domestic demand remains the principal constraint, underscoring the urgent need for coordinated fiscal and monetary action. Looking to the second half, with stronger counter-cyclical measures, sustained external resilience, and fading high-base consumption distortions, the economy is expected to recover moderately. GDP growth is projected at 4.5% and 4.8% for the third and fourth quarters respectively, bringing the annual figure to approximately 4.7%.
Supply and demand weaken in tandem with domestic demand lagging but structural quality improving
July saw broad declines across key supply and demand aggregates, driven by ongoing geopolitical tensions and extreme weather disruptions domestically, yet production, exports, domestic demand, and pricing all displayed signs of qualitative improvement. Industrial value-added growth decelerated noticeably, with equipment manufacturing and high-tech sectors providing stronger support while other industries edged closer to zero growth. Services output also pulled back, with transportation and producer services easing. Consumption growth slipped further despite a low comparison base, reflecting weak internal momentum and diminishing returns from trade-in subsidy policies, heightening the case for more forceful policy intervention focused on broadening income gains and enhancing service supply to unlock consumer potential.
Investment contraction deepened, with infrastructure declines widening further even as new-type infrastructure accelerates, though funding constraints and project shortages persist. Manufacturing investment is declining at a more moderate pace, characterized by strength in high-tech areas and weakness in traditional sectors. Property investment continues its downward trajectory, with the bottoming process marked by sluggish sales, inventory pressure, weak land acquisition, and tight financing conditions. Export growth remains robust, with AI supply chains and advanced manufacturing as primary drivers, notably supported by price increases in AI-related products.
Inflation: Weakening imported support with continued structural divergence
July CPI inflation fell more than anticipated, while core CPI held relatively steady, with food and energy prices contributing the main drag. The composition reveals a pattern of strong technology prices, stable services, and diminishing policy support. PPI declined beyond expectations on both annual and monthly bases, with imported factors accounting for nearly 90% of the drop, while AI chains remained firm and building materials and mid-to-downstream sectors stayed weak. Going forward, price trends are likely to shift from reflation to high-level moderation, with August CPI and PPI projected at approximately 0.7% and 2.9% respectively, though structural divergence will persist amid the ongoing transition between old and new growth drivers.
Finance: Credit quality over quantity with bonds underpinning better-than-expected social financing
July social financing exceeded expectations, supported by government bonds and direct corporate financing, with bond and equity issuance effectively filling the gap left by weaker credit growth, signaling early progress in financing structure transformation. Credit characteristics reflect a slowdown with quality improvements, as reduced bank balance-sheet padding was the primary drag, while both household and corporate short- and long-term loans continued to contract, indicating persistently weak real-sector demand. M1 growth held steady from the prior month, supported by household demand deposits, while M2 growth moderated due to a higher base and weaker credit creation, with the trend of deposits migrating to asset management products remaining intact. Looking ahead, existing fiscal and quasi-fiscal tools are expected to accelerate implementation, a rate cut appears possible in the third quarter, and ample liquidity conditions are likely to persist.
Production: Industrial and services sectors face mounting pressure with accelerating K-shaped divergence
Industrial production moderated considerably, with K-shaped divergence between new and old growth engines intensifying. July saw industrial value-added above designated size rise 4.5% year-on-year, down 0.8 percentage points from June even on a low base, while month-on-month growth slowed to 0.11%, a notable sequential deceleration. Structural data shows equipment manufacturing and high-tech manufacturing growing 12.3% and 16.9% respectively, accelerating by 1.3 and 2.8 percentage points from the prior month, contributing nearly 100% and over 60% to overall industrial growth. From January to July, new growth engines contributed 50.9% of industrial expansion, surpassing half and up 3 percentage points from the first half. Conversely, other industrial sectors, accounting for over 60% of output, saw growth approach zero, with mining contracting 4.2% and utilities growing 5.0%, both down more than 2 percentage points, while several raw material and downstream consumer goods manufacturers also slowed considerably. Industrial production faces a tug-of-war between positive forces from new engines and policy support against negative pressures from weak domestic demand, moderating export growth, and elevated costs, with near-term downside risks warranting attention 鈥?only 279 of 626 tracked products saw output increases in July 鈥?though full-year growth of around 5.5% remains achievable.
Services output also moderated, with producer services and transportation easing. The services production index rose 4.3% year-on-year in July, down 0.4 percentage points from June. Information transmission, software, and IT services grew 9.3% while leasing and business services expanded 9%, both decelerating slightly but still well above overall services growth. Transportation was hampered by extreme weather in some regions, while other services remained relatively soft due to sluggish property and consumption recovery. Structural support from low bases, digital economy momentum, and policy emphasis on services expansion and human capital investment will continue, though overall recovery still depends on stabilization in property and consumption.
Consumption: Further weakening with stronger case for policy support
January-to-July retail sales grew 1.2% year-on-year, continuing the deceleration trend and trailing the 2025 full-year pace by 2.5 percentage points. July retail sales rose just 0.6%, down 0.4 percentage points from June despite a clearly lower comparison base, with month-on-month growth easing to 0.06%, underscoring the fragile foundation for consumption recovery. Three features stand out. First, trade-in categories remain a notable drag, contributing -1.4 percentage points to retail growth even as high-base effects have substantially faded, reflecting diminishing policy returns from prior demand pull-forward. Auto sales fell 17%, building decoration declined 14.2%, and furniture dropped 8.8%. Second, basic goods spending decelerated markedly, with alcohol and tobacco, cosmetics, textiles and apparel, grain and oil foods, and daily necessities all slowing considerably from June, affected by post-618 promotion fatigue and weak consumer willingness and capacity. Third, K-shaped divergence persists with services resilient and goods under pressure. Service retail sales grew 5.0% from January to July, easing 0.3 percentage points but still outpacing goods retail by 3.9 percentage points, reflecting the long-term consumption upgrade trend. While fading high-base effects and stronger counter-cyclical measures may provide some support, the K-shaped economic pattern and insufficient breadth of income and employment gains fundamentally cap consumption capacity and willingness, limiting the recovery trajectory.
Investment: Widening contraction with improving structure
Fixed asset investment fell 6.7% year-on-year from January to July, widening by 1.0 percentage point from the first half despite low-base effects, signaling urgency for investment momentum. Private investment declined 9.4%, a record low outside pandemic periods, pressured by compressed downstream profits, tight cash flow, and weak traditional export demand, while state-controlled investment fell to -3.3%, also near pandemic-era lows, indicating insufficient policy support. Across the three major categories, infrastructure, property, and manufacturing investment all saw cumulative contractions widen by 1.2, 1.2, and 0.5 percentage points respectively, reflecting deeper infrastructure and property drags alongside more moderate manufacturing declines, influenced by both extreme weather and structural adjustment pressures. Conversely, high-tech industry investment grew 5.0% from January to July, accelerating 0.4 percentage points from the first half and outpacing overall investment by 11.7 percentage points. With stability priorities prominent and external supply chain disruption risks receding, fiscal spending and bond utilization are expected to accelerate, supported by the "six networks" infrastructure push, emerging engine leadership, and lower bases, likely narrowing the investment contraction in the second half. Infrastructure investment may recover moderately with fiscal support and major projects, manufacturing investment should see continued structural improvement but remain subdued amid K-shaped divergence, and property investment will likely persist in bottoming adjustment.
Manufacturing investment declined 1.7% year-on-year from January to July, widening 0.5 percentage points but showing the shallowest downward slope among the three categories, with high-tech industries and equipment upgrades providing key support. High-tech manufacturing investment grew 3.3%, outpacing overall manufacturing by 5.0 percentage points, with computers, communications, electronics, and electrical machinery accelerating. Equipment and tool purchases rose counter-cyclically by 0.9 percentage points to 9.0%, with the "two new" policies providing some cushion. Traditional manufacturing remained weak, with most reported sub-sectors seeing declines or continued contraction amid extreme weather disruptions and weak demand. Going forward, industrial upgrading, supply chain security, and policy support will sustain manufacturing investment, though near-term levels are likely to stay low given downstream profit pressure and sluggish property and consumption fundamentals.
Infrastructure investment fell 3.6% year-on-year from January to July, widening 1.2 percentage points from the first half, with persistent declines this year amplifying the drag on overall investment. Beyond weather-related construction delays, both funding and project pipelines face pressure: special bond issuance slowed again in July to approximately 341.2 billion yuan, down 275.7 billion year-on-year, with cumulative progress at 54.7%, lagging last year by 8.4 percentage points, while insufficient quality local project reserves and strict implicit debt controls have dampened momentum. Sectoral divergence is evident: aviation and information transmission investment grew 15.7% and 26.0% respectively, accelerating by 4.7 and 0.4 percentage points from the first half, whereas road transport narrowed its decline by 0.2 percentage points, and water management and public facilities investment fell by 1.1 and 2.9 percentage points, remaining in negative territory. Electricity, heating, gas, and water production and supply investment widened its contraction by 2.6 percentage points to -5.3%, reflecting post-pandemic overexpansion and insufficient quality projects. As existing fiscal policies accelerate implementation, new-type policy financial instruments launch, and "six networks" projects expand, infrastructure investment is expected to lead a moderate recovery, with future focus on computing power networks, safety resilience projects, and digital transformation of traditional infrastructure.
Property investment continued its bottoming search, falling 19.2% year-on-year from January to July, widening by 1.2 percentage points from the first half. Construction area contracted slightly more to -12.7%, with land purchase fees and declining construction costs being the primary drags. Market stabilization still appears distant. Sales remain depressed, with commercial housing sales area down 11.8% and sales value down 13.1% from January to July, though the latter narrowed by 0.5 percentage points. Inventory pressure persists, with unsold commercial housing area down 0.8% for five consecutive months but the sales-to-inventory ratio holding at a historically elevated 11.5. Prices continue falling, with new home prices in 70 major cities flat month-on-month at -0.2% and down 3.4% year-on-year, narrowing by 0.1 percentage points. Leading indicators show no improvement: development funding sources contracted 20.3%, widening 0.1 percentage points, and land transaction area in 100 major cities remained at -10.4% on a trailing twelve-month basis, indicating developers face no stabilization in financing, land acquisition, or sales, suggesting property investment remains in a bottoming process requiring further policy support.
Exports: AI supply chains and high-end manufacturing lead with notable price support
January-to-July imports and exports grew 26.7% and 18.5% respectively, both within high-growth territory since 2021, exhibiting resilient exports with even stronger imports. July saw imports and exports grow 27.5% and 23.9% respectively. Export resilience stems from three factors. First, export diversification with strong growth across major partners: exports to the US grew 17.1% in July, up 3.2 percentage points from June, while ASEAN, EU, BRICS, South Korea, and Africa saw growth of 38.4%, 16.0%, 22.3%, 46.6%, and 18.2% respectively. Second, continued structural optimization with AI supply chains and high-end manufacturing as core drivers: mechanical and electrical products accounted for 65.1% of exports, growing 33.8%, with integrated circuits, automatic data processing equipment, high-tech products, and autos surging 116.6%, 67.4%, 52.7%, and 60.4% respectively, where price increases, particularly for AI-related products like integrated circuits and data processing equipment, provided substantial support. Third, global manufacturing PMI held at a robust 52.1%, with US and EU PMIs above 51, providing solid external demand support.
For the remainder of the year, exports are expected to maintain strong resilience, with full-year growth projected around 15%. Industrial competitiveness and accelerating structural upgrading position mechanical and electrical products and high-tech goods as primary engines, comprising 65.1% and 30.0% of exports respectively from January to July, with growth of 26.0% and 40.7% outpacing overall exports by 7.5 and 22.2 percentage points. Market diversification and product optimization continue, with exports to the US narrowing declines rapidly to 2.6% growth from January to July, improving by over 25 percentage points from January, while non-US markets including ASEAN, EU, Africa, BRICS, and Belt and Road countries maintain high growth. New energy vehicles, industrial robots, and other high-tech products show strong momentum, with digital and green trade support strengthening. Deep integration into the Asian semiconductor supply chain, which accounts for 62% of global AI trade, positions China to benefit from industry tailwinds, while Middle East conflicts are accelerating global energy security transitions and directly boosting demand for "new three" exports. However, global trade slowdown and Middle East geopolitical risks pose headwinds: WTO forecasts 2026 global merchandise trade volume growth slowing from 4.6% to 1.9%, potentially further to 1.4% if conflict-driven oil price spikes persist, creating a more complex external environment.
Inflation: Weakening imported support with continued structural divergence
CPI inflation narrowed from 1.0% to 0.5% year-on-year in July, with core CPI easing slightly from 1.0% to 0.9%. On a monthly basis, CPI fell 0.1%, weaker than the ten-year seasonal average of 0.3%, though core CPI was flat against historical norms, indicating food and energy as primary drags. Food prices were pressured by vegetables and eggs, running 0.6 percentage points below historical seasonal patterns, while energy components fell sharply by 5.6% month-on-month, reducing the annual contribution by 0.46 percentage points and accounting for essentially the entire decline. Structurally, CPI displays a pattern of strong technology, stable services, and weakening policy support: services prices rose 0.4% month-on-month, with summer travel lifting tourism prices slightly above seasonal trends and medical services up 1.1% on policy adjustments; communication tools rose 1.0% month-on-month and 8.3% year-on-year, reflecting robust AI-related demand; household appliances edged up 0.2% while transportation tools fell 1.3% year-on-year, indicating further diminishing returns from trade-in policies.
PPI rose 3.5% year-on-year in July, down 0.6 percentage points from June, with month-on-month prices falling 0.7%, widening by 0.4 percentage points, primarily due to weakening imported factors from oil and non-ferrous metals, while domestically, AI chains stayed strong but building materials and mid-to-downstream sectors remained weak. Imported factors dominated the decline, with oil and petrochemicals and non-ferrous chains jointly contributing nearly 90% of the monthly PPI drop, impacting -0.48 and -0.13 percentage points respectively. New growth engines continued providing support, with AI supply chains (electrical machinery, computers, communications) contributing +0.1 percentage points for ten consecutive months. Building materials chains declined on weather disruptions and weak investment demand, with ferrous metal smelting, non-metallic mineral products, and coal prices all easing. Mid-to-downstream prices remained under pressure: the combined impact of oil, non-ferrous, building materials, and AI chains was -0.51 percentage points, below the overall -0.7% monthly decline, indicating that excluding these core chains, other mid-to-downstream sectors still saw negative price momentum. Overall, both CPI and PPI declined beyond expectations in July, with imported factors as the primary drag and endogenous price momentum structurally divergent and generally weak. With US-Iran negotiations in flux, international oil prices are likely to fluctuate, and the peak of imported inflation pressure has passed. Combined with weak domestic demand recovery amid the growth transition, domestic prices are likely to shift from reflation to high-level moderation, with August CPI and PPI projected at approximately 0.7% and 2.9%. Structural divergence will persist given weak demand and obstacles in the employment-income-consumption cycle, keeping pressure on mid-to-downstream corporate profits.
Finance: Credit prioritizes quality over speed with bonds supporting better-than-expected social financing
July saw social financing improve beyond expectations, supported by bond issuance filling the gap left by weaker credit, while credit and M2 growth continued to moderate, with reduced bank balance-sheet padding and weak household and corporate demand as primary drags.
Social financing reached 1.40 trillion yuan in July, exceeding the market consensus of 1.15 trillion and increasing by 271 billion year-on-year, ending four consecutive months of declines. The stock growth rate held at 7.4%. Corporate bonds, government bonds, and equity financing provided the main support, while credit remained subdued. Corporate bond issuance reached 453.6 billion yuan, the highest for the period on record with a year-on-year increase of 178.8 billion, and cumulative January-to-July issuance was up 1.1 trillion year-on-year. Non-financial enterprise equity financing totaled 112.8 billion yuan, the highest for the period since 2023, up 62.3 billion year-on-year with cumulative increases of nearly 200 billion. The rising importance of direct corporate financing reflects both structural adaptation to economic transformation and policy support from lower issuance costs and capital market reforms. Government bonds added 1.3 trillion yuan in July, up 69.4 billion year-on-year even on a high base, indicating accelerated fiscal catch-up, with over one trillion yuan in additional year-on-year issuance expected from August to December per the annual plan. Off-balance-sheet financing saw reduced declines of 88.8 billion, with undiscounted bank acceptance bills contributing 110.8 billion, partly due to regulatory constraints on on-balance-sheet bills shifting demand off-balance-sheet, while trust loans contracted further by 37.5 billion and entrusted loans improved by 15.5 billion, remaining weak due to sluggish property and local government financing platform demand. New yuan loans on a social financing basis were -589.6 billion, the lowest monthly figure on record, declining by 160 billion year-on-year, reflecting weak real-sector financing demand intertwined with structural adjustment during the growth transition. Going forward, accelerated fiscal and quasi-fiscal implementation, direct financing offsetting weaker credit, and low-base effects should support a gradual bottoming and moderate recovery in social financing growth.
New yuan loans totaled -340 billion in July, the lowest monthly figure on record, down 290 billion year-on-year, with credit growth falling to 5.1%, also a historic low. However, credit structure improved, with bill financing and non-bank loans as primary drags while household and corporate short- and long-term loan contractions did not widen further. Reduced bank balance-sheet padding was the main drag: bill financing and non-bank financial institution loans declined by 495.4 billion and 174.7 billion year-on-year respectively, reflecting improved regulatory guidance and the normalization of credit quality over quantity. Household credit remained negative but did not worsen from the prior year: short-term and long-term household loans both turned negative in July, though on a low base they narrowed declines by 42.7 billion and widened by 10.2 billion respectively, roughly unchanged from last year. Business operating loans provided the main support, while consumer loans maintained year-on-year declines. Cumulatively from January to July, household sector new loans were -827.1 billion, with their share of total new loans falling from a peak of nearly 50% to -8.0%, indicating persistently weak household leverage appetite amid unstable employment expectations and elevated debt pressures, underscoring the long road to household balance sheet repair. Corporate short-term and long-term loans turned negative at -250 billion and 230 billion respectively, improving year-on-year by 300 billion and 30 billion due to a low base and substitution of bill financing with short-term loans. However, cumulative January-to-July medium- and long-term corporate loans contracted by approximately 1.6 trillion year-on-year, indicating no significant improvement in weak corporate financing demand. This reflects limited loan demand from new growth industries, continued bottoming in old industries that remain debt-dependent, cautious investment decisions amid complex geopolitical conditions and oil price volatility, substitution of loans with lower-cost bond financing, and slower utilization of fiscal and quasi-fiscal tools (e.g., PSL net redemptions of 520.6 billion from February to July) limiting associated credit demand.
M1 growth held at 4% in July, unchanged from June, with household demand deposits and reserve funds accelerating by 0.4 and 3.8 percentage points respectively as primary supports, while corporate demand deposit growth slowed by 0.6 percentage points, indicating marginally weaker corporate deposit activation. M2 growth eased 0.3 percentage points to 7.7%, primarily due to a higher base and weaker credit-driven money creation. Deposit structure showed household deposits at -630 billion and non-bank deposits at 1.11 trillion, with year-on-year improvements of 480 billion and declines of 1.03 trillion respectively, reflecting increased risk asset volatility this month combined with strong capital market performance last year. However, absolute declines in household deposits alongside increases in non-bank deposits indicate the continued trend of deposits shifting toward wealth management and fund products. Corporate deposits declined by 170.9 billion year-on-year while fiscal deposits increased by 208.5 billion, indicating still-slow fiscal spending pace. With weak private sector leverage appetite and pronounced domestic demand shortfalls, coordinated fiscal and monetary acceleration is increasingly necessary. Existing fiscal and quasi-fiscal tools are expected to accelerate implementation, a third-quarter rate cut appears plausible, liquidity should remain ample and loose, and structural tools with lower rates and expanded scope warrant attention.
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