China’s mid-year economic review: forging ahead amid volatility and divergence

China’s economy held steady in the first half of the year, with new drivers and services consumption helping sustain momentum amid investment challenges and evolving trade dynamics.

In brief

• China’s economy growth in the first half of the year (H1) holds steady as new engines emerge.
• Strengthening counter-cyclical adjustment in the second half of the year (H2) to stabilize growth and advance industrial transformation.

China’s economy growth in H1 holds steady as new engines emerge.

Gross domestic product (GDP) posts five-year high incremental growth amid a pronounced K-shaped economic pattern

China’s GDP totaled RMB69.57 trillion in H1, rising 4.7% year-on-year (YoY)¹ and recording its biggest incremental increase over the past five years for the same period. Real GDP growth moderated to 4.3% in the second quarter (Q2), while improved price indicators pushed nominal GDP growth to 5.9%.² The GDP deflator turned positive for the first time in 12 quarters, reflecting a pattern of weaker real output amid rising prices. A K-shaped landscape was evident across the economy — emerging growth drivers including high-end manufacturing, the digital economy and modern services contributed over 40% of total GDP growth.

Consumption divergence accelerates with new drivers gaining momentum

China’s total retail sales of consumer goods hit RMB24.87 trillion in H1, up 1.3% YoY.³ While households turned more conservative on big-ticket spending, demand for services, premium upgraded goods and new consumption continued to expand. Markets showed clear divergence across distribution channels and geographic tiers, with online retail sales outpacing offline brick-and-mortar consumption. Rural consumption growth maintained its outperformance over urban consumption, with lower-tier markets emerging as a key driver of new consumption growth, underpinning domestic demand expansion and urban-rural integrated development.

Fixed-asset investment (FAI) records deepening declines amid periodic headwinds

FAI fell 5.7% YoY in H1⁴, with downward momentum accelerating markedly in Q2. Most traditional infrastructure projects saw delayed progress due to slower issuance of local special bonds, however, FAI in new infrastructure such as computing power and next-generation communication networks defied the broader downturn. Looking ahead to H2, FAI in high-end manufacturing and infrastructure is set for a steady recovery, with the implementation of major infrastructure and manufacturing projects and the gradual deployment of RMB800 billion new policy financial instruments. The construction of the “six networks” will serve as a critical lever to mobilize private capital.

Foreign trade remains resilient amid a narrowing surplus

China’s total goods trade reached RMB25.47 trillion in H1, rising 16.9% YoY⁵ with a moderate narrowing in the accumulated trade surplus. Robust artificial intelligence (AI) industry expansion and global low-carbon transition served as core growth drivers for outbound shipments, while imports of tech-related goods also picked up momentum. Exports from the private segment kept rising, with new materials, electronic information products and high-end equipment increasing by 44.5%, 43.1% and 29.8%⁶, respectively. Looking ahead to H2, export growth will be increasingly underpinned by structural advantages, though price volatility will remain a persistent downside risk to trade volumes.

Strengthening counter-cyclical adjustment in H2 to stabilize growth and advance industrial transformation.

Accelerating fiscal spending and doubling down on hard tech

Against sustained K-shaped economic divergence, the July Politburo meeting set the core policy tone of “fully leveraging the existing policies and rolling out incremental measures in a timely manner” and reiterated the need to strengthen counter-cyclical adjustment. On the fiscal side, authorities will speed up the issuance and deployment of proceeds from local special bonds and ultra-long-term special treasury bonds, and more capital expenditures are poised to shift toward hard tech such as AI and advanced manufacturing. From a monetary perspective, the central bank will maintain a moderately accommodative stance while enhancing policy adjustments and a targeted approach. Reserve requirement ratio cuts and interest rate reductions will be implemented on a discretionary basis.

Services and innovative consumption usher in a new era of high-quality development

Services consumption is expected to sustain robust growth in H2, with structural divergence further intensifying across sub-sectors. The recently unveiled 17 new measures for AI-enabled consumption drive coordinated advancement across five key dimensions: supply, demand, infrastructure, business models and regulatory governance. These efforts empower the intelligent transformation of consumer service sectors, smart elderly care and large language models in education, accelerating product iteration and the large-scale commercialization of high-value scenarios. Smart home devices, lightweight wearables and service robots are expected to see explosive growth.

Policy tailwinds fuel scaled AI commercialization

Since the start of the year, integration between domestic AI agents and the real economy has deepened substantially. The industry is rapidly shifting its focus from foundational computing infrastructure construction toward high-value, large-scale commercial rollout. The 2026 Digital-Physical Synergy Initiative addresses core bottlenecks in industrial transformation, covering 20 pillar industries including steel, automotive manufacturing, aerospace, advanced equipment manufacturing and new materials. The initiative aims to build a mature industrial AI application ecosystem by year-end and to form a virtuous closed loop of “data collection—AI model iteration—industry-specific scenario implementation”.

Multiple efforts to promote balanced trade development

On the policy front, emerging business forms such as digital and green trade have been designated as priority development areas. Authorities are ramping up the supply of high-quality services through fiscal and financial tools, trade facilitation reforms and innovation incentives. Meanwhile, the government will gradually ease market access restrictions in telecommunications, education, culture, health care, finance and other fields. By proactively aligning with high-standard international economic and trade rules, China will lift foreign equity caps in service industries, attracting global resources into the market.

Real estate enters a new policy cycle

After years of deep adjustment, the real estate market has transitioned into a new phase featuring regular risk management, stock-based transformation and household balance sheet repair. Policy priorities have shifted from targeted risk mitigation toward stabilizing the market, boosting domestic demand and lifting consumption. The real estate market is expected to see notable K-shaped divergence in H2. First- and second-tier cities will see a resilient recovery, while third- and fourth-tier cities will prioritize stabilization and accelerate inventory destocking.

Multi-tiered capital markets bolster technological innovation

A series of institutional reforms have steadily broadened IPO access for hard-tech enterprises. The STAR Market has expanded its fifth set of listing criteria, the ChiNext Board has rolled out a fourth listing standard for tech innovators, and the Hong Kong Stock Exchange has launched its dedicated Technology Enterprise Channel. These initiatives have transformed capital markets from a traditional financing tool into a core platform underpinning the innovation-driven development strategy, supporting the development of AI, quantum computing and commercial aerospace, etc. As the direct financing system matures, more capital will flow into R&D and advanced manufacturing sectors to fuel industrial upgrading.