Summary of Key Points
In the first half of 2026, China's economy managed to maintain its stability thanks to strong exports and a recovery in industrial activity. However, declining investment and weak consumer demand led to a significant shortfall in domestic demand. In the second half of the year, exports are expected to slow down due to external uncertainties and a high base from last year, putting pressure on all three key drivers of growth (exports, investment, and consumption) and making it challenging to achieve the annual growth targets. To address this, the article proposes five targeted policy areas: finance, monetary policy, real estate, investment, and consumption, with the aim of boosting domestic demand and stabilizing the overall economy.
First Half of the Year: Economic Performance
The economy as a whole did not deviate significantly, but there were uneven developments within the country:
- Positive Highlights: Exports and industrial activity served as pillars of growth—strong export performance (due to good overseas demand) and an acceleration in industrial recovery (more factories operating) kept the economy within a healthy range.
- Hidden Concerns: Domestic demand became a weakness: Investment decreased by 18% (worse than in the first quarter, indicating that the real estate market was still in a downturn), and both infrastructure and manufacturing investment weakened. Consumer spending also declined sharply, with automobile sales falling by 12.6% (automobiles account for 23% of retail sales). Additionally, households were more inclined to save (the savings rate rose to 64.5%), indicating that they were not spending their money.
Deep-seated Reasons for Weak Domestic Demand
Both investment and consumption faced obstacles:
Investment Obstacles:
- Real Estate: The real estate sector was still in a downturn; developers were hesitant to acquire land and build new properties, leading to continued declines in investment.
- Infrastructure: The issuance of special bonds was uneven across the first half of the year—too many were issued in the first quarter, leaving insufficient funds in the second quarter. Slow project approvals and the need to repay existing debts further reduced infrastructure investment, which dropped from 8.9% in the first quarter to -2.4% in the second half.
- Manufacturing and Private Investment: Both domestic and foreign investment declined, affecting all regions of the country.
Consumption Obstacles:
- Low Income Growth: Real household income grew by only 4.2%, slower than GDP's growth rate of 4.7%. Low- and middle-income groups (such as workers in the real estate and traditional manufacturing sectors) saw smaller wage increases.
- Wealth Reduction: Falling housing prices made people feel poorer, discouraging them from making major purchases (such as household appliances and furniture).
- Policy Changes: The reduction in new energy vehicle purchase taxes and subsidies reduced automobile sales, impacting consumer spending.
- Government Spending Cuts: Local governments were struggling to repay debts, leading to tighter fiscal budgets and decreased government spending, which weakened consumer demand.
- High Savings Rates: Households saved most of their income rather than spending it.
Pressure in the Second Half of the Year
The three key drivers of growth (exports, investment, and consumption) may all face challenges:
- Exports: The external environment is uncertain (e.g., fluctuations in other economies), and last year's high export base could lead to a decline in exports.
- Investment and Consumption: Already weak, combined with declining exports, it will be difficult to meet the annual growth targets.
Solutions: A Compendium of Five Targeted Policies
To overcome these challenges, the following policies are proposed:
1. Finance:
- Support for Key Economic Provinces: Major economic provinces (such as Guangdong and Jiangsu) account for more than 60% of China's GDP and are vital drivers of growth.
- Provide them with experimental authority in areas like data flow and green finance, with central government funding for reforms and rewards upon success (up to 50 million yuan).
- Support cross-regional projects, such as those in the Yangtze River Delta and the Guangdong-Hong Kong-Macao Greater Bay Area, by covering upfront costs (up to 100%).
- Offer additional incentives if private capital can leverage central funds (20% more rewards if private enterprises hold a significant stake in the projects).
2. Monetary Policy:
- Make Money More Affordable and Available: Reduce reserve requirements and interest rates to make credit more accessible, with priority given to banks in major economic provinces for mortgage and manufacturing loans.
- Targeted Lending: Increase lending to private enterprises and those engaged in technological innovation (lending targets increased from 1 trillion yuan to 1.5 trillion yuan, with interest rates lowered by 10 basis points).
3. Real Estate:
- Precise Regulation: Implement city-specific policies—relaxation of purchase restrictions in certain cities, lower housing provident fund interest rates, and increase loan amounts; reduce supply in less developed areas to clear inventory.
- Urban Renewal: Use special bonds and government bonds to support urban revitalization and affordable housing construction (annual target: 2.5 trillion yuan).
- Support for Real Estate Developers: Provide low-interest loans to quality developers and accelerate debt restructuring for troubled firms, while revitalizing existing assets (e.g., through REITs).
4. Investment:
- Address Weaknesses and Boost Growth:
- Infrastructure: Issue special bonds more evenly throughout the year, increase the proportion of funds used as project capital (from 20% to 30%), and support new infrastructure projects (e.g., in data centers and water management).
- Manufacturing: Provide subsidies for equipment upgrades and digital transformation, and reduce financing costs to stabilize manufacturing investment.
- Private and Foreign Investment: Simplify the entry of private capital into the infrastructure sector and offer tax incentives to foreign investors in manufacturing.
5. Consumption:
- Direct Support: Increase household income by establishing income-increasing funds and providing job stabilization subsidies to companies that hire mid- to low-skilled workers. Raise pension and minimum living standards.
- Encourage Major Purchases: Provide subsidies for buying new vehicles and replacing old appliances/furniture, and lower mortgage interest rates to ease consumer pressure.
- Reduce Savings: Increase healthcare reimbursement rates and expand childcare and elderly care services to encourage spending. Offer discounted consumer loans with reduced interest rates.
Policy Focus: Precision and Targeted Measures
These policies are not a generalized approach but focus on key areas:
- Economic Powerhouses: Concentrate resources on regions that can drive growth the most.
- Major Consumer Sectors: Provide direct support to sectors like automobiles and household appliances, which have a significant impact on overall consumption.
- Real Estate Stability: Stabilizing the real estate market affects many related industries.
- Private Investment: Activate private capital to boost economic vitality.
In summary, these policies aim to encourage spending and investment, stimulate domestic demand, and help achieve the annual growth targets, setting a positive foundation for the next five-year development plan.