- China’s slow domestic demand is countered by exports and a thriving tech cycle.
- Domestic demand has weakened across retail, investment, credit, and property indicators.
- Tech and new-economy firms are benefitting from strong bond and equity financing.
- Core inflation below 1% limits concerns over deflation or price instability.
- Exports and domestic tech cycle remain strong, offsetting weak domestic retail demand.
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COMMENTARY: China’s economic bifurcation
China’s domestic demand weakness has become more pronounced in recent months. From retail sales to fixed asset investment, credit demand to property prices, there has been a palpable deceleration this year.
The domestic demand slowdown however does not compel us to revise down China’s 2026 GDP growth forecast of 4.5%. With 5% growth in 1Q, the ongoing deceleration in domestic demand still leaves the economy with enough momentum to chalk up mid-4% annual real growth, in our view.
There are aspects of bifurcation in the Chinese economy that contribute to our relatively constructive take. Bank lending growth may be weak, bond and equity financing, particularly among tech and new-economy firms, continue to flourish. Core inflation at just under 1% also limit fears of price instability or deflation.
Trade continues to thrive. Although energy imports have contracted as domestic oil reserves are being run down this year, China’s overall imports were up 30% through July. A key reason for this is strong external demand and the domestic AI investment cycle, fuelling demand for regional tech inputs.
On external demand, tariff volatility, trans-shipment scrutiny, excess capacity concerns, and national security-related push-back have not managed to dent China’s export juggernaut. Total exports during Jan-July exceeded USD2.5trln (up 18.5%yoy), underscoring rapidly rising demand for made-in-China products, increasingly at the higher end of the value-added spectrum. Even the contentious area of trade with the US, exports exceeded USD40bn both the June and July, up 20%+yoy. China’s thriving domestic tech cycle and strong external demand are critical offsets to its lacklustre domestic demand scenario.
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