August data reveals sustained divergence in the economy characterised by robust external demand against sluggish domestic demand, strong production versus weak consumption, and high-growth new economy sectors contrasted with pressure on traditional industries.

Most indicators for consumption and investment declined month-on-month during the period, while financial data corroborated a pattern of slowing aggregate growth alongside improving structural efficiency. Credit demand from households and traditional enterprises weakened, though direct financing and credit needs within new economy sectors demonstrated resilience.

Exports maintained rapid growth, reflecting both the accelerating transition between old and new growth drivers domestically and the synchronous global technology cycle. The primary challenge remains insufficient endogenous demand and an oversupply landscape, increasing the urgency for coordinated fiscal and monetary policy action. Looking ahead to year-end as counter-cyclical measures gradually take effect, the economy is projected to bottom out with a modest recovery in September, with GDP expected to grow 4.5% in Q3, 4.6% in Q4, and approximately 4.6% for the full year respectively.

Where the economy stands now

August industrial value-added output grew 5.2% year-on-year, up 0.7 percentage points from July, with high-tech manufacturing expanding 16.7% and digital product manufacturing rising 15.7%. New economy sectors now contribute over 60% of industrial growth for large-scale enterprises. The services production index increased 4.1%, marking the lowest reading since the start of 2025, with information transmission, software, and IT services leading at 9.6% growth.

Retail sales growth slowed to 0.4% year-on-year, dragged down by auto sales and other trade-in categories, while service retail maintained better momentum with 4.9% growth for the January–August period. Fixed asset investment fell 7.2% year-on-year, with the decline widening by 0.5 percentage points, though high-tech industry investment bucked the trend with 5.2% growth.

On the price front, the CPI rose 0.8% year-on-year while core CPI reached 1.0%, driven primarily by energy and gold price increases. The PPI turned positive month-on-month and rose 3.8% year-on-year, with crude oil and non-ferrous metal chains contributing nearly 80% of the monthly improvement.

August social financing came in below expectations at RMB 1.66 trillion, with new RMB loans of only RMB 55.2 billion dragging heavily. Credit growth fell to 4.9%, a historic low, as households continued net repayment and corporate loan demand weakened. Direct financing continued gaining prominence, accounting for 50.3% of total new social financing over January–August, exceeding bank loans share. M1 growth unexpectedly improved to 4.1%, while M2 slowed to 7.5%.

Industry production: surprising rebound driven by exports and state-owned enterprises

The rebound in industrial production exceeded market expectations, supported by strong export demand and state-owned enterprise activity. Mining and SOE value-added growth improved by 2.8 and 1.4 percentage points respectively month-on-month, driven by energy security measures and accelerated investment in the country's "six networks" infrastructure projects.

However, segments facing headwinds include some raw material manufacturing industries affected by extreme weather, weak domestic demand, and rising oil prices, alongside persistently subdued downstream consumer goods production. Private enterprise industrial value-added growth held steady at 3.7%.

While production faces near-term downward pressure from competing forces of new economy growth and policy support against weak domestic demand and potentially moderating export growth, annual industrial growth is projected at approximately 5.5%. Only 286 of 626 industrial products tracked saw output increases in August, indicating breadth challenges.

Consumption: trade-in fatigue and constrained recovery capacity

Retail sales grew just 1.1% over January–August, 2.6 percentage points below the full-year 2025 pace. August retail sales grew 0.4%, down 0.2 percentage points despite a lower year-earlier base, with monthly growth again turning negative. The six major trade-in categories alone dragged retail growth down by 1.4 percentage points, with automobiles contributing 1.9 percentage points of the drag, reflecting both demand front-loading and high penetration rates for big-ticket consumer goods.

Basic living necessity consumption remained weak, with pharmaceuticals, cosmetics, grain and oil products, and daily necessities all recording low single-digit growth and most declining from July levels. Meanwhile, service retail maintained comparatively strong momentum with 4.9% growth, outpacing goods retail by 3.8 percentage points. Communications equipment sales grew 16.3%, maintaining double-digit growth for two consecutive years.

The persistent K-shaped economic divergence continues limiting income growth breadth, fundamentally restraining consumer capacity and willingness to spend. Stimulus policy effectiveness is diminishing, as evidenced by retail growth hovering at or below 1% from April through August even as base effects moderated considerably. Policy focus should shift toward broadening household income improvement and enhancing service supply quality.

Investment: infrastructure decline softening, manufacturing easing, property deepening

Fixed asset investment fell 7.2% year-on-year in January–August, with the decline widening 0.5 percentage points. Private investment dropped 10.1%, widening by 0.7 percentage points and recording a double-digit contraction for the first time outside the pandemic period, while state-controlled investment declined 3.3% with policy support effects still limited.

Manufacturing investment decreased 2.3%, with cost increases and weak domestic demand as primary drags. Transport equipment and special equipment investment improved most on infrastructure project implementation, while computer and electrical machinery investment growth moderated. Real estate investment plunged 19.9%, with new construction starts and completed floor area growth rates both worsening. Housing sales fell 12.1% by floor area and 13.0% by value, inventory-to-sales ratios remain at historic highs, and property prices continue declining. Development funding sources contracted 21.0%, with land purchasing by major cities showing no stabilisation signals, confirming the deep adjustment phase persists.

Infrastructure investment declined 4.0%, with the pace of decline softening somewhat. Special bond issuance reached approximately RMB 518.8 billion in August, with nearly half allocated to debt resolution rather than new projects. Traditional infrastructure segments lagged while new infrastructure outperformed, as air transport investment grew 16.7% and information transmission investment rose 28.4%. With new policy-based financial instruments rolling out from September, infrastructure investment is expected to see a moderate recovery led by computing power networks, security resilience projects, and digital transformation of traditional infrastructure.

Exports: AI chain and high-end manufacturing lead, prices amplify gains

August exports grew 25.0% year-on-year while imports rose 28.2%, both maintaining strong momentum. Exports to the US increased 34.4%, up 17.4 percentage points from July, while shipments to ASEAN, BRICS nations, South Korea, and Africa grew between 24.9% and 49.3%. Exports to the EU moderated to 6.6% amid weak regional demand and trade frictions.

Mechanical and electrical products accounted for 65.3% of exports and grew 32.8%. Integrated circuits exports surged 129.8%, automatic data processing equipment rose 76.5%, high-tech products gained 56.9%, and automobiles increased 43.0%. Price increases, particularly for AI-chain products, provided substantial export value support. Global manufacturing PMI remains elevated at 52.7%, providing ongoing external demand support.

Full-year export growth of around 20% appears achievable given competitive advantages in machinery and high-tech goods, market diversification, and deepening integration into Asian semiconductor supply chains that handle 62% of global AI trade. However, WTO projections for global goods trade volume growth to slow sharply to 1.9% in 2026, potentially 1.4% if Middle East tensions persist, present considerable headwinds.

Price trends: import-driven recovery with potential PPI re-acceleration

The CPI rise to 0.8% year-on-year was largely propelled by energy and gold prices, with fresh vegetable, pork, and egg prices running below seasonal patterns. Energy prices rose 4.1% and gold jewellery surged 33.6%, together contributing essentially all of the monthly CPI improvement. Core goods maintained divergent trends, with household appliances and transport equipment falling into negative territory while communications tools accelerated to 10.6% growth reflecting strong AI-related demand.

The PPI rebound to 3.8% year-on-year was primarily import-driven, with crude oil and non-ferrous metal chains contributing nearly 80% of the monthly increase. AI-chain industries including electrical machinery and computer communications added 0.09 percentage points monthly, maintaining positive contributions for 11 consecutive months. Building materials chains declined on weather disruptions and weak investment demand, while select mid-to-downstream sectors including textiles, apparel, and stationery saw price increases whose sustainability remains uncertain.

Looking ahead, geopolitical tensions may sustain import-driven price pressures, though insufficient domestic demand continues constraining price momentum. September CPI and PPI are projected at approximately 0.9% and 4.3% respectively.

Financial conditions: credit demand weakness demands stronger policy coordination

August social financing totalled RMB 1.66 trillion, missing market expectations by over RMB 300 billion and marking the largest single-month year-on-year decline since 2025 at RMB 90.8 billion. Bank loans contributed over 60% of the contraction, while government bond issuance remained slow on a high comparison base. Corporate bonds and equity financing provided bright spots, with direct financing accumulating to 50.3% of total social financing through August, surpassing loan proportions by 7.5 percentage points.

Households continued net debt repayment in August, with short-term loans declining RMB 121.9 billion and medium-to-long-term loans falling RMB 82.2 billion year-on-year. Enterprise borrowing weakened significantly, with short-term loans declining RMB 230 billion and medium-to-long-term loans down RMB 150 billion year-on-year. The January–August cumulative household loan balance turned negative at approximately RMB 1 trillion, marking accelerating household deleveraging amid unstable employment expectations and heavy debt burdens.

Four factors explain weak enterprise credit demand: low loan dependence of new economy industries, cautious corporate investment amid geopolitical complexity, substitution by lower-cost bond financing, and slow fiscal tool deployment with PSL net redemptions of RMB 572.7 billion over February–August. Bill financing and non-bank institutional loans provided some offset.

M1 growth improved to 4.1%, primarily supported by government and institutional demand deposits with limited private sector improvement. M2 slowed to 7.5%, constrained by weak credit creation and slow fiscal disbursement. Deposit migration toward wealth management products continued, with non-bank deposits rising over RMB 6 trillion this year.

Given weak private sector leveraging appetite and pronounced domestic demand weakness, coordinated fiscal and monetary easing is increasingly necessary. Existing fiscal tools should accelerate deployment, with interest rate cuts likely in September or Q4 and liquidity expected to remain ample and accommodative, alongside potential expansion of structural policy tools.