Summary of Key Points
The most prominent feature of the Chinese economy in the first half of 2026 is a "K-shaped divergence": new drivers such as the AI industry chain, high-end manufacturing, and exports continue to grow, while old drivers like consumption, real estate, and traditional infrastructure remain weak. The forecast for GDP growth in the second quarter is an average of 4.5% (lower than the 5% in the first quarter), and economists believe that the economy is in a period of transition between old and new drivers—new drivers are not yet strong enough to fill the gap left by the decline of old ones. Policies are expected to be strengthened in the second half of the year to stabilize growth, with short-term measures focusing on stabilizing employment, increasing income, and coordinating fiscal and monetary policies, while long-term solutions require institutional reforms and technological innovation to improve efficiency and break this divergence.
I. "K-shaped Divergence": One Rising, One Falling
The "K-shaped divergence" refers to two opposing forces within the economy:
- New drivers on the rise: The AI industry chain, high-end manufacturing (such as chips and new energy equipment), and foreign trade exports are performing well. The manufacturing PMI returned above the 50% threshold in June (above 50 indicates economic expansion), mainly driven by these new sectors; high export growth has also boosted related industries.
- Old drivers on the decline: Consumption, real estate, and traditional infrastructure are holding back. For example, although consumption may have turned positive in June, this is largely due to a low base from last year; real estate is even more pronounced, with sales of commercial housing in 30 major cities declining by 6.7% year-on-year, and real estate companies being cautious about acquiring land; investment in traditional infrastructure is still negative, and the PMI for small businesses remains below the threshold, indicating difficulties.
In simple terms, new industries are gaining momentum, but the old pillars of the economy have not yet stabilized, leading to a disconnect between the two.
II. A Preview of Key Indicators from the Half-Year Reports: GDP, Consumption, and Investment—A Mixed Bag
1. GDP: The forecast for the second quarter is 4.5%, slower than the 5% in the first quarter, mainly due to increased domestic demand pressure.
2. Consumption: Social retail sales are expected to grow by 0.5% in June (finally turning positive), but this is due to a "base effect"—consumption was very low last year, so any improvement this year appears more significant. Service consumption (such as dining and tourism) has improved: the Dragon Boat Festival fell in May last year but in June this year, and lower oil prices have encouraged more people to go out.
3. Investment: The cumulative growth rate from January to June is expected to be -4.2% (still negative), with real estate being the biggest drag (both new construction and sales are weak). However, the government has issued special treasury bonds (the third batch totaling 193.5 billion yuan), which could accelerate infrastructure investment in the second half of the year, potentially reducing the decline in investment.
III. How Will Policies "Rescue the Economy"? Stabilizing Consumption, Supporting Investment, and Precise Monetary Policy
To address this divergence, policies will focus on three main areas:
- Stabilizing consumption: The key is to encourage people to spend money. Experts suggest starting with stabilizing employment and raising wages—only when income expectations improve will people be willing to consume. Weak consumption last year was due to the overspending on "replacing old items with new ones" (such as household appliances), combined with poor performance in the real estate market and weather effects; the root cause of these issues must be addressed by improving income levels.
- Supporting investment: The government will play a role in providing support. Three batches of special treasury bonds have been issued, focusing on "national strategic projects" and "security capacity building," with infrastructure investment expected to accelerate in the second half of the year (annual growth forecast at 4%-4.5%). In the real estate sector, land auctions in key cities are becoming more active, but overall, real estate companies are still cautious about acquiring land, so confidence needs to be gradually restored.
- Monetary policy: Instead of a "flood-like" approach, the central bank is adopting a "precision-targeted" strategy. It emphasizes "proactivity (acting in advance), flexibility (adjusting as needed), and specificity (focusing on key areas)," such as using structural tools to support the AI industry and small and medium-sized enterprises, ensuring that funds flow to where they are truly needed and avoiding idle capital.
IV. Long-Term Solutions: Reform and Technological Innovation to Address Weaknesses
To completely resolve the K-shaped divergence, we cannot rely solely on short-term policies; we need to fundamentally improve economic efficiency (referred to as "total factor productivity"—using the same resources to produce more output):
- Institutional reform: For example, adjusting taxes (moving consumption tax from the production stage to the consumption stage to encourage local governments to promote consumption) and increasing the proportion of workers' wages (so that people can share in the economic benefits).
- Technological innovation: AI is a key driver. It can improve efficiency and drive new forms of consumption (such as smart home appliances and AI services), benefiting various industries and gradually narrowing the gap between old and new drivers.
Experts point out that this cannot be achieved overnight; it requires the joint efforts of governments, businesses, and markets. However, this is the only way to break the current divergence.
In summary, the current economy is characterized by new sectors growing while old ones are adjusting. In the short term, policies will provide support, but in the long run, we need to rely on reforms and technological innovation to stabilize the economy and lay the foundation for future growth.