By Zhu Tian

China's latest economic data presents a striking paradox. While industrial output and high-tech manufacturing continue to post solid gains, consumption remains subdued, investment has weakened, and net exports have lost momentum. How can production continue to grow when the economy's main demand drivers are faltering?

In this article, CEIBS Vice President, Co-Dean and Professor of Economics Zhu Tian examines these questions and explains why boosting domestic demand should now be the priority for policymakers to sustain China's economic growth.

 

China's first-half 2026 economic data shows resilient supply but persistently weak demand, especially in consumption and investment. More strikingly, all three components of demand underperformed: consumption grew only modestly, investment declined significantly, and net exports dropped compared with the same period last year. This naturally raises the question: if demand has shown little momentum, how has production continued to grow at around 5%?

This does not necessarily mean there is a problem with the data. Rather, it highlights a growing disconnect between production and demand. More important than the headline GDP growth rate of 4.7% is this divergence between the two sides of the economy.

China's supply side remains resilient. Technological progress continues, and new growth drivers are emerging. The challenge is that domestic demand is insufficient to absorb this expanding supply. As a result, macroeconomic policy should place greater emphasis on boosting aggregate demand through stronger fiscal and monetary measures that stimulate both consumption and investment.

Supply Side: Industrial Production Continues to Expand

China's GDP reached RMB 69.57 trillion in the first half of the year, up 4.7% year-on-year in real terms. Growth slowed from 5.0% in the first quarter to 4.3% in the second, but remained within the 4–5% range.

By sector, the secondary sector expanded by 3.9%, while the tertiary sector grew 5.2%, indicating that the production side of the economy has continued to maintain growth.

Industrial output also performed well. Value-added industrial output of large enterprises rose 5.4%, with manufacturing up 5.6%, equipment manufacturing 9.3%, and high-tech manufacturing 13.3%. Output of 3D printers, lithium-ion batteries, and industrial robots surged by 48.5%, 39.3%, and 28.0%, respectively.

The service sector also maintained steady growth. Value-added services grew by 5.2%, while information transmission, software, and IT services expanded 10.7% and leasing and business services grew 11.9%.

Taken together, these figures demonstrate that China's industrial capabilities, technological progress, and emerging industries continue to expand.

This reflects a pattern that has characterised China's economy in recent years: "half fire, half ice."

The former is represented by dynamic sectors such as artificial intelligence, new energy vehicles, batteries, photovoltaics, advanced manufacturing, and industrial robotics, where Chinese companies have increasingly become global leaders rather than followers.

The latter is represented by the country's much larger traditional industries and service sectors, where growth remains subdued.

The H1 data reinforces this contrast: while the supply side continues to generate new momentum, demand has failed to keep pace.

Demand Side: Weak Consumption, Falling Investment, and Slowing Net Exports

Consumption remains soft

Retail sales of consumer goods rose only 1.3% in the first half of the year, with retail goods sales increasing 1.1% and catering revenue 2.8%. Even when service consumption is included—a broader measure of total consumer spending—growth reached only 2.7%.

Compared with real GDP growth of 4.7% and production growth exceeding 5%, consumption remains noticeably weak.

Investment continues to contract

Fixed-asset investment (excluding rural households) fell 5.7% year-on-year. Even excluding real estate development, investment still declined 2.7%. Infrastructure investment dropped 2.4%, manufacturing investment fell 1.2%, while real estate development investment plunged 18.0%. Private-sector investment also weakened, declining 8.5%, or 4.9% after excluding real estate.

Given that investment accounts for roughly 40% of China's GDP, such declines represent a substantial drag on aggregate demand.

Property remains the biggest headwind

The property sector continues to weigh heavily on China’s economy. Real estate development investment declined 18.0% in the first half of this year, new home sales by floor area fell 11.6%, and sales value dropped 13.6%.

These figures suggest that the property downturn is far from over.

Real estate is far more than a single industry. It is deeply connected to construction, building materials, household appliances, furniture, financial institutions, local government finances, and household balance sheets. As long as the property market continues to contract sharply, aggregate demand will struggle to meaningfully recover.

Net exports are also weakening

Headline trade figures appear encouraging: total imports and exports increased 16.9%, with exports up 13.4% and imports rising 22.1%. From the perspective of aggregate demand, however, the key indicator is net exports—exports minus imports.

Exports totaled RMB 14.73 trillion, while imports reached RMB 10.74 trillion, leaving a trade surplus of approximately RMB 3.99 trillion.

Because imports grew faster than exports, the trade surplus was actually smaller than last year, meaning net exports contributed less to overall demand.

Taken together, the picture is striking:

•      Consumption grew by only about 2.7%

•      Investment declined 5.7%

•      Net exports weakened

Based solely on these demand-side indicators, it would be difficult to infer an economy growing close to 5%. Yet production indicators—including GDP and industrial output—continued expanding at around that pace.

This mismatch suggests that either differences in statistical methodology require closer examination or, more fundamentally, that production growth is increasingly outpacing the economy's capacity to generate final demand.

Looking Beyond Headline GDP

If we focus only on GDP growth of 4.7% or industrial output growth of 5.4%, China’s economy appears reasonably healthy. However, examining production and demand together reveals a different picture: production remains resilient, but demand remains weak. Supply continues to improve, while domestic demand faces mounting pressure.

Price indicators seem to have improved. Consumer prices (CPI) rose 1%, core CPI increased 1.2%, and producer prices (PPI) climbed 1.5%, suggesting that persistent deflationary pressures may be easing.

Nevertheless, inflation remains below the government's 2% target, and part of the rise in producer prices merely reflects higher global oil prices. Moreover, both CPI and PPI declined 0.3% month-on-month in June, indicating that price recovery remains fragile.

More importantly, weak consumption and falling investment—particularly private investment and real estate investment—continue to signal underlying weakness in demand.

Headline GDP growth also fails to capture how businesses and households actually experience the economy. Businesses care about revenue and profits. Households focus on wages, employment, housing prices, and future income expectations. Local governments rely on tax revenues and land sales.

If production grows while consumption and investment remain subdued, firms will struggle to improve profitability. And if real estate and private investment continue to decline, confidence will remain difficult to restore.

Technological Progress and Weak Demand Can Coexist

This leads to the following question: if demand is so weak, why are high-tech industries still growing at double-digit rates? Part of the answer lies in exports. Even in a weak macroeconomic environment, individual industries can continue to perform relatively well, particularly those supported by strong export demand. Data shows that China's exports of machinery and electrical products rose 20.1% in the first half of 2026, accounting for 63.5% of total exports, while exports of high-tech products surged 39%.

More fundamentally, technological progress and weak aggregate demand can coexist. History offers important examples.

During the 1930s, the United States experienced the Great Depression, high unemployment, and deflation. Yet it was also a period of remarkable technological advancement. Electricity, automobiles, highways, chemicals, aviation, household appliances, and mass-production techniques all continued to develop, while productivity improved substantially.

Yet the US economy did not fully recover until after the outbreak of World War II. The key reason was not a lack of innovation, but an insufficient recovery in private consumption and investment. Concerned about budget deficits, the federal government failed to provide enough macroeconomic stimulus.

The lesson remains highly relevant today: technological progress and industrial upgrade alone cannot resolve a deficiency in aggregate demand.

Japan's experience after the bursting of its asset bubble in the early 1990s offers a similar lesson. Despite retaining world-class technological capabilities, prolonged deleveraging by households and businesses suppressed demand and contributed to decades of slow growth and deflationary pressure.

Although successive governments introduced stimulus measures, they were generally too limited and withdrawn too quickly amid concerns over public debt. The result was decades of sluggish growth despite rising government liabilities.

China today differs from both 1930s America and 1990s Japan in terms of its stage of development, institutional framework, and international environment. Nevertheless, all three economies share one important characteristic: strong technological progress coexisting with insufficient aggregate demand.

If policymakers focus only on the impressive performance of high-tech industries while underestimating weak consumption and investment, they risk adopting an overly cautious macroeconomic policy stance.

Moreover, if insufficient demand persists, stronger productive capacity could actually intensify price competition and compress corporate profits, eventually slowing both production growth and technological progress.

Policy Priority: Strengthen Aggregate Demand

The policy direction is relatively straightforward. The immediate priority should be to boost both consumption and investment.

First, stimulate household consumption on a meaningful scale. The fastest and most effective approach would be for the central government to issue special treasury bonds to finance nationwide consumption vouchers. Rather than relying on fragmented local government programmes worth only a few hundred billion yuan, the initiative should be implemented on a much larger scale—potentially several trillion yuan. For example, vouchers worth RMB 3,000 per person, totaling roughly RMB 4 trillion, could significantly strengthen households' purchasing power and willingness to spend.

Second, stabilise the property market. The objective should not be to reignite another property boom, but to prevent real estate from continuing to drag down the broader economy. Existing measures such as financing support for developers, ensuring housing delivery, government purchases of unsold homes, urban renewal, and public housing initiatives are moving in the right direction, but remain insufficient.

A more effective solution would be for the central government to establish a national real estate restructuring platform to classify existing projects: provide funding to completed projects that remain viable; liquidate projects with no prospect of completion according to law; and acquire completed but unsold housing that serves public needs for use as affordable or rental housing.

Third, increase central government leverage. Additional borrowing could finance consumption vouchers, support property market stabilisation, and replace high-interest local government debt with lower-cost central government bonds. At the same time, local governments should be encouraged to increase spending instead of being constrained, particularly on public services and social welfare. China has abundant national savings, but households, businesses, and local governments currently lack both the willingness and the capacity to borrow more. Under such circumstances, the central government must step in to fill the demand gap.

Conclusion: Reviving Demand

China’s 2026 H1 economic data sends a clear message. China's economy continues to generate new growth engines, and technological innovation remains impressive, yet these strengths cannot fully offset the challenge of insufficient demand. Rapid growth in high-tech industries and stable industrial production must be viewed alongside sluggish consumption, falling investment, and weakening net exports.

From the demand side, the foundations of economic growth remain fragile. The experiences of the United States in the 1930s and Japan in the 1990s suggest that technological progress and weak aggregate demand can coexist. Without sufficiently forceful macroeconomic policy, advances in high-tech industries alone will not restore balanced economic growth.

Structural reforms remain important. Improving the business environment, strengthening confidence among private and foreign enterprises, reforming fiscal institutions, and enhancing social welfare systems are all essential long-term priorities. But structural reforms alone cannot solve short-term demand deficiencies.

The key task for the second half of the year is therefore to expand aggregate demand more decisively: stimulate consumption, stabilise investment, support emerging industries while preventing further deterioration in real estate and traditional sectors, and pursue long-term reforms alongside stronger countercyclical policy.

China's greatest strengths lie on the supply side. What it now needs is a demand-side recovery powerful enough to restore balance and put the economy on a more sustainable growth path.

Zhu Tian is Vice President and Co-Dean, Santander Chair in Economics at CEIBS. He's an expert on the Chinese economy and the author of Catching Up to America: Culture, Institutions, and the Rise of China (Cambridge University Press, 2021).