China: Domestic demand slows, imbalances keep rising

China Macro – November data point to further slowdown in domestic demand…

China’s activity data for November published this morning point to a further weakening in growth momentum, in line with the signals provided by the November PMIs which came out two weeks ago. On the demand side, the biggest negative surprise came from retail sales, with annual growth dropping back to 1.3% y/y (October/consensus: 2.9%), the weakest reading since the messy Zero-Covid exit late 2022. This was partly driven by base effects, reflecting the stepping up of consumer subsidies in Q4-2024. On the supply side, growth of industrial production slowed marginally to 4.8% y/y, the lowest pace since August 2024 (October: 4.9%, consensus: 5.0%).

The annual contraction in fixed investment deepened more than expected, to -2.6% y/y in January-November (Jan-Oct: -1.7%, consensus: -2.3%). This year, fixed investment will likely show the first annual decline since 1998. This is led by property investment, for which the annual contraction worsened to -15.9% y/y in January-November (Jan-Oct: -14.7%, consensus: -15.4%). Still, infrastructure investment is also showing a remarkable decline, as local governments face tighter borrowing constraints and a significant part of their borrowings is used to refinance so-called hidden debt. The slump in home sales also deepened, to -11.2% in January-November (Jan-Oct: -9.4%), while the monthly decline in home prices accelerated. Despite the overall weakening in the November data, the surveyed jobless rate was steady at 5.1%.

…and rising imbalances that could trigger new trade tensions

All in all, the slowdown in domestic demand seen in the November data coupled with the acceleration in exports reported last week illustrate a picture of growing imbalances in the Chinese economy. This may feed further trade tensions, also with Europe. China’s overall annual goods trade surplus is on its way to reach a record high this year. According to Bloomberg data, China’s annual surplus in goods traded with Europe will likely also reach a record high this year, and will surpass China’s surplus with the US which has come down sharply this year. Last week, European Commission president Von der Leyen stated that EU-China ties have reached an ‘inflection point’. And French president Macron, after returning from a China visit, said last week Europe may be forced to take strong measures, such as installing more tariffs, if China does not take measures to reduce its large trade surplus with the EU.

Central Economic Work Conference signals shift in focus towards investment support

Also last week, Chinese policy makers held their annual Central Economic Work Conference. The official statement following this meeting suggests that Beijing will continue with accommodative fiscal and monetary policies, but not in the form of a massive support programme. This is in line with our expectation that a credit bazooka is not yet on the cards, also see our 2026 China Outlook here. We expect the nominal budget deficit to be kept at 4% of GDP, and also anticipate further modest cuts of policy rates and bank RRRs. Supporting domestic demand will remain the top priority for 2026. It is likely that the trade-in subsidies for durable goods will be maintained, and – as was already flagged in the 15th Five-Year Plan discussed in October – the government is also working on raising urban and rural incomes by expanding various social programmes. Not surprisingly, given the sharp decline in fixed investment seen over the past months, a shift in focus towards stabilising investment is visible. This seems to come in the form of traditional infrastructure investment, through direct funding from the central government and more local special-purpose bonds issued by local governments. It is also likely that the CNY 500bn policy financing tool (subsidised loans by policy banks) launched in October will be kept in place next year. Meanwhile, last week it was reported that Beijing is weighing a USD 70bn support package to strengthen the developments of China’s domestic semiconductor industry.