China Matters From Weak to Weaker

Economics Research 21 August 2026 | 10:59PM HKT

n China’s July activity data showed renewed growth weakness, and we estimate Hui Shan | that official real GDP is running at around 4% yoy in early Q3. The combination of Goldman Sachs (Asia) L.L.C.

lower volumes and lower prices indicates that the weakness is demand-driven. n July’s growth deceleration is more concerning than April’s because it came from a lower starting point and impacted areas that had previously looked resilient. Q2 real GDP growth was only 4.3% yoy, below the government’s full-year target of 4.5–5%. By our estimates, growth of services retail sales slowed to 3.2% yoy in July after running above 5% earlier this year, raising questions about household consumption momentum. n Looking back over the past few years, policy support has been too small relative to the shock, leaving the private sector under sustained financial pressure. Policymakers’ near-exclusive focus on technology innovation and high-tech manufacturing does not easily lend itself to a more virtuous cycle of stronger employment, income and consumption, as manufacturing accounts for only around 20% of employment in China. These factors help explain why growth tends to soften notably whenever headwinds emerge. n After the July Politburo meeting turned more dovish, the government announced various easing measures, including faster government bond issuance and starting the new policy-based financing instrument to invest in the “Six Networks” and major projects in the 15th Five-Year Plan, support for large sectors with long value chains (likely electronic equipment and machinery), relaxed Housing Provident Fund rules, and measures to boost consumption in lower-tier cities and rural areas. n Upcoming measures may help the government meet this year’s growth target, but they remain mostly supply-driven and are unlikely to create durable momentum. In our view, without stronger demand-side stimulus and fundamental reforms to unleash domestic demand, cyclical weakness risks becoming structural hysteresis.

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A Weak Batch of Data China’s July activity data weakened from June and disappointed already-low market expectations. Industrial production (IP) was relatively resilient, rising 4.5% yoy, supported by robust export growth. By contrast, retail sales grew only 0.6% yoy, and fixed asset investment (FAI) contracted 6.7% yoy in the first seven months of this year, implying double-digit year-over-year declines in July. With the construction sector still contracting and high-frequency data not pointing to a noticeable pickup, the July official IP and services output index suggest that China’s official real GDP growth is running at a pace of around 4% yoy in the first half of Q3.1

Following the weaker-than-expected macro data and the PBOC’s mid-month overnight reverse repo operations to inject liquidity, our conversations with traders and investors suggest that market expectations of monetary policy easing increased somewhat. The yield on 10-year Chinese Government Bonds (CGB) also fell below 1.70%. Compared with end-February, just before the start of the Iran War, 10-year CGB yields have declined by more than 10bp, suggesting the market’s view that this year’s energy-driven inflation is likely temporary, growth headwinds remain strong, and policy easing is warranted. In sharp contrast, yields on 10-year government bonds in other countries have climbed substantially since late February (Exhibit 2).

Exhibit 1: July activity data weakened from June and Exhibit 2: Yields on 10-year governments climbed in other missed market expectations countries but declined in China

bp change since Feb 27 bp change since Feb 27 Percent yoy Percent yoy -Year Government Bond Yield

4 China activity data 4 80 80 China US 2 2 60 Germany 60 Japan 0 0 40 40 -2 -2

June Actual 20 20 -4 -4 July Bloomberg Consensus July Actual 0 0 -6 -6

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