China: Weak July data add to urgency of support

China Macro – Weak July data point to a worsening of domestic imbalances

In line with the signals provided by the July PMIs published some weeks ago, China’s activity data for July published this morning also pointed to a further weakening in growth momentum, and a worsening of domestic supply-demand imbalances. On the demand side, retail sales slowed to a weak 0.6% y/y (June: 1.0%, consensus: 1.5%), and to 0.1% m/m s.a. (June: 0.4%). Although retail sales do not capture China’s full consumption picture, fragile consumer confidence, slowing income growth and a weakening labour market seem to keep putting a brake on household demand. After having fallen to 5.0% in June, the surveyed jobless rate rose back to 5.2% in July. Meanwhile, after a short recovery period in Q1-26, the reported slump in annual fixed investment that started in April has deepened further, reaching a post-pandemic low of -6.7% y/y ytd in July. Property investment remains deeply in negative territory, but also annual growth of manufacturing and infrastructure investment has fallen to contraction territory in recent months.

On the supply side, industrial production slowed to 4.5% y/y (June: 5.3%, consensus: 5.0%), and to 0.1% m/m s.a. (June: 0.8%), with bad weather conditions affecting overall production and the re-escalation of US-Iran tensions extending the drag on oil refinery production. Still, all in all, the production side remains much stronger than the demand side. That is also visible in ongoing export strength, with Chinese exports growing by 23.9% y/y in July. Note that his also reflects China benefiting from the strong global tech cycle, with Chinese imports growing at an even faster pace of 27.5% y/y in July.

The urgency of adding policy support is rising again

Although Chinese exports are still benefiting from the global tech/AI boom, the re-escalation of tensions in the Middle East and the broadening of weakness in domestic demand means that the balance of risks to the Chinese economy is shifting into a negative direction again. Moreover, domestic supply-demand imbalances seem to worsen further, which may add to trade frictions with key trade partners. In any case, the July data show that the Chinese economy has entered the second half of the year on a weak footing, and with growth already having fallen to 4.3% y/y in Q2 – below Beijing’s target range of 4.5%-5.0% for the full year – the urgency for policy makers to add support is rising again. The communication following the Politburo session of end-July suggests that so far Beijing is still viewing the energy shock as a temporary one, preferring a (quicker) execution of previously announced measures – such as a scaling up of bond issuance by local governments boosting infrastructure investment – rather than implementing a new round of fresh measures. However, should economic data fail to show at least some stabilisation in the coming weeks/months, the need to come with more substantial support measures will rise further.