China Matters Path of Least Resistance

Economics Research 20 September 2026 | 1:44PM HKT

n The production-consumption gap is widening. Industrial production growth Hui Shan | accelerated to 5.2% yoy in August, while retail sales growth slipped to 0.4% yoy. Goldman Sachs (Asia) L.L.C.

Measurement issues suggest the supply-demand gap may be even wider than official data indicate. With policymakers focused on high-flying subsectors such as robots and semiconductors, there appears little urgency for broad-based easing, absent a sharp deterioration in the labor market, and the divergence could widen further. n From “property drags on the economy” to “the economy weighs on property.” China is nearing the typical 30% real house price decline and six-year timeline observed in historical international data of large-scale housing busts. But weak labor markets and still-falling rents are likely to prolong the downturn in many parts of China. Outside top-tier cities and premium segments, the path of least resistance is further price weakness. n Structural shift is a bigger headwind to employment than to GDP. Credit growth has slowed materially as the economy pivots away from credit-intensive property and infrastructure toward AI and high-tech manufacturing. That mix can sustain exports and headline output, but it is less labor-intensive. As China presses ahead with technological innovation and manufacturing competitiveness, the drag on employment, household income, and consumption is likely to persist. n The growth target dilemma. We expect sequential growth to pick up in coming months, supported by faster government bond issuance and increasing infrastructure investment. But that would still leave Q3 and Q4 real GDP growth at 4.4% yoy and full-year growth at 4.5%, the lower bound of the government’s 4.5-5.0% target. Annual growth targets help coordinate resources and support the long-term objective of “doubling income by 2035,” but they also push the government to lean on investment whenever growth slows, delaying rebalancing. The path of least resistance may be gradual RMB appreciation and more export-rebate cuts to manage large trade surpluses and rising trade tensions, alongside a gradual downgrade of the annual growth target—for example, from “4.5-5.0%” in 2026 to “around 4.5%” in 2027.

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The Gap Keeps Growing China’s August activity data showed a widening divergence between supply and demand, and between manufacturing output and household consumption. Industrial production growth accelerated from 4.5% yoy in July to 5.2% in August, while retail sales growth slowed from 0.6% yoy to 0.4%. Among major activity indicators, only export value and industrial production growth exceeded 5.0% yoy in August. By contrast, many domestic demand gauges continued to post large year-over-year declines (Exhibit 1).

For exports, we can cross-check the data against trading partners’ reported imports from China. Such “mirror data” support strong Chinese export growth. For domestic demand, however, there are statistical reasons why official data may understate the true weakness. For example, in retail sales, large retailers above the designated size are surveyed comprehensively, whereas small retailers are sampled and estimated because of their large numbers and the difficulty of surveying every small retailer each month (see our latest edition of “Understanding China’s Economic Statistics” for more details). As a result, officially reported sales growth at small retailers tends to be smoother than that at large retailers and to hold up better during economic downturns. In August, sales at large retailers declined by almost 4% yoy, while sales at small retailers increased 3% yoy (Exhibit 2). This implies an even greater divergence between strong exports and weak domestic demand than official data indicate.

Exhibit 1: Only export value and industrial production Exhibit 2: Official data show small retailers significantly grew more than 5% yoy in August outperformed large retailers in August

Percent yoy…