China: Slower Growth Despite Strong Exports Boosts Likelihood of Economic Support

China’s economy lost momentum in the second quarter, as gross domestic product growth slowed to 4.3% year-on-year, the lowest level since late 2022, due to weak household spending, declining investment, and ongoing stagnation in the real estate sector. July data indicate that these challenges persisted into the third quarter, with retail sales growth slowing to 0.6% compared with around 1.0% in June, and industrial production growth declining to 4.5% from approximately 5.3% in June, while the cumulative year-on-year decline in fixed-asset investment since the beginning of the year widened to 6.7%. Meanwhile, new home prices continued to fall, recording a 3.2% year-on-year drop in July, after more than three years of continuous decline. The official Purchasing Managers’ Index (PMI) remained below the 50-point threshold for the second consecutive month in August, reflecting sustained weakness in economic activity. Against this backdrop, policymakers continue to rely primarily on targeted measures to support demand, while keeping the option of easing monetary policy open should economic conditions deteriorate further. On the other hand, exports remained strong, posting growth of nearly 20% year-on-year during the first eight months of 2026, driven by robust global demand for technology products and AI-related goods. However, this export strength may not be sufficient to offset the persistent weakness in domestic demand. Consequently, near-term economic outlooks increasingly depend on the ability of government policies to effectively stimulate domestic demand, a factor that will be crucial for achieving the government’s 2026 economic growth target of between 4.5% and 5%.