Chinese economy

21 August 2026, 06:50 UTC Chief Investment Office GWM Investment Research

Zooming in weak consumption: Two sides of a coin Chinese economy Authors: Yifan Hu, CIO Greater China and Head Macroeconomics APAC, UBS AG Hong Kong Branch; Kathy Li, CFA, Macro Strategist, UBS AG Hong Kong Branch

• Household deleveraging is weighing on consumption as mortgages and consumer loans contract.

• A K-shaped economy is emerging and widening: export-oriented new-economy sectors remain resilient, while old-economy sectors remain under pressure.

• An ongoing shift of household deposits points to debt repayment and a rotation into nonbank financial assets.

• Fiscal re-leveraging is the main growth lever, with faster bond issuance and policy-bank financing expected to support investment.

China’s consumption growth has been weak year to date, Consumer loan book contracted for the first time in stark contrast with resilient exports. In particular, retail this year sales growth remains subdued near the lower end of its pre-COVID-19 range. While the fading impact of goods trade-in subsidies have played a role, the more important— and longer-lasting—factor may be household deleveraging. This shift in household behavior is likely to remain a key constraint on domestic demand.

Household deleveraging accelerating We estimate household leveragefell to 56.2% of GDP in 1H26, from 59.5% at end-2025. Corporate and government leverage remained broadly stable over the same period, while the fiscal position improved.

Property and consumer loans, which are key indicators of household leverage, have both declined year-to-date. Outstanding mortgages have also contracted for five consecutive quarters, while consumer loans fell by an Source: CEIC, PBoC estimated CNY 1tr in 1H26, or 3.2% y/y, marking the first decline since the series began. Short-term operating loans also turned negative in 1H26, suggesting weaker financing The macro-micro divide demand among individual businesses. While household deleveraging has constrained consumer demand, the divergence between company-level performance and aggregate data remains pronounced. One

This report has been prepared by UBS AG Hong Kong Branch. Please see important disclaimers and disclosures at the end of the document.

way to describe this is the gap between “micro feeling” or home buying. Where did the money go? There are two and “macro data”: selected new-economy industries appear key destinations, in our view. more resilient than the broader domestic-demand data suggest, while traditional sectors remain under pressure. One is for debt repayment or deleveraging, as reflected in the continued mortgage contraction and reduced consumer The electric vehicle (EV) sector is a strong case in point. loans. Export volumes have grown at a high double-digit pace in recent years as manufacturers have expanded overseas. Second, we think a growing share of funds may have shifted Domestic EV retail sales, by contrast, have declined by into other financial assets. Lower deposit rates may also be more than 10% y/y year-to-date as trade-in and purchase encouraging some households to shift savings into wealth- subsidies have faded following their strong support in 2024– management products, mutual funds, insurance products, 25. bonds, or equities. Early signs of this rotation are visible in the rise of deposits held by non-bank financial institutions For leading EV manufacturers and other export-oriented (NBFIs). new-economy companies, overseas demand may partly offset weak domestic conditions. However, this support UBS Evidence Lab’s October 2025 wealth survey indicated remains subject to trade-policy risks. Recent US technology that mass affluent respondents intended to reallocate part restrictions and China’s response require close monitoring. of their financial assets into nonbank investments, mainly The upcoming Xi–Trump meeting, scheduled for 24 including wealth management products (17% share of September, could provide greater clarity on bilateral financial asset), stocks (11%), insurance (6%), mutual equity relations and the export outlook. funds (5%), and bond (3%).

EV sales illustrates the external-domestic Deposit migration underway…