- External trade strengthened further, driven by continued AI-related high-tech export demand.
- Overall industrial activity moderated, while high-tech manufacturing cushioned the slowdown.
- Consumption, investment and credit demand stayed subdued.
- Price momentum moderated, suggesting reflation momentum is rather weak when oil prices ease.
- Market implication: We expect the 1Y LPR to hold at 3.00%, with fiscal support remaining key.
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China’s growth momentum stayed uneven, with resilient exports cushioning weak domestic demand. Amid AI-electronics upcycle July exports strengthened. Overall industrial activity moderated, but resilient high-tech manufacturing provided an important offset. Meanwhile, consumption, investment and credit demand stayed subdued.
Trade
External trade momentum strengthened further. Exports rose 23.9% yoy in July, largely on par with the 27.0% growth in June. Semiconductor exports nearly doubled yoy, while high-tech exports increased 40.7%, highlighting continued strength in AI-related electronics demand. Imports also accelerated to 27.5%, reflecting stronger purchases of intermediate goods alongside firm export orders. The AI-electronics upcycle maintained a key support to growth, although the high base should lead to some moderation ahead.
Industrial production
Upstream activity slowed, while high-tech manufacturing stayed on an uptrend. Industrial production eased from 5.3% yoy in June to 4.5% yoy in July, amid weaker mining activity. Strong export demand continued to cushion overall production despite subdued domestic demand. High-tech manufacturing was still a key driver, expanding 16.9% yoy during the period. The AI and electronics upcycle should continue to support high-tech and capital equipment manufacturing.
Fixed asset investment (FAI)
Investment sentiment stayed tepid. The contraction in FAI widened to 6.7% yoy ytd in July, from 5.7% yoy ytd in June. Private investment was the main drag. State-led investment provided some offset, but was insufficient to reverse the broader investment downturn. Property investment fell 19.2% yoy, as developers continued to prioritize project completion amid soft housing demand and elevated inventories.
Retail sales
Household sentiment was still fragile. Retail sales eased to 0.6% yoy in July, from 1.0% yoy in June. Automobiles and other big-ticket goods, such as furniture, continued to weigh on headline growth. The prolonged property downturn, limited equity wealth effects, income uncertainty, and salary cuts in traditional services and finance continued to constrain household confidence and discretionary spending.
Loans and deposits
Monetary indicators stayed soft. Outstanding loan growth eased to 5.1% yoy in July, from 5.2% yoy in June, while new yuan loans fell sharply. Corporate and household medium- to long-term lending stayed subdued, indicating continued caution around borrowing.
Meanwhile, credit conditions continued to show a K-shaped pattern. While bank lending was still weak, bond and equity financing, particularly among tech and new-economy firms, continued to rise. Direct financing enabled firms to access funding despite tighter access to bank loans, reflecting higher credit risk and limited collateral.
Inflation
Price momentum moderated, suggesting that reflation momentum was still weak as oil prices eased. PPI growth slowed from 4.1% yoy in June to 3.5% yoy in July, while CPI inflation eased from 1.0% yoy to 0.5% yoy. Core CPI held relatively stable at 0.9% yoy, suggesting that the decline in headline inflation was largely driven by lower energy prices. Meanwhile, muted domestic demand continued to limit broader price pressures.
Conclusion and implications for policy rates
We expect the PBOC to keep the 1Y LPR unchanged at 3.00%. Resilient exports and stable industrial activity continued to cushion the economy, while soft retail sales, FAI, and credit demand highlighted persistent domestic fragility. The PBOC kept a moderately loose monetary policy stance and emphasized stronger counter-cyclical support. However, an immediate rate cut appears unlikely, given already very low nominal rates.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
nathanchow@dbs.com
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