Summary of Key Points
This article highlights that although the Chinese economy is generally recovering, there is a clear divergence in its internal structure: the technology sector (such as chips and AI-related industries) is showing strong performance in exports and investment, becoming a pillar of growth; however, the real estate industry and some traditional sectors are continuing to face pressure. Although CPI (Consumer Price Index) and PPI (Producer Price Index) have shown temporary improvements, these gains are largely driven by external or short-term factors, raising doubts about their sustainability. The performance of bond, stock, and foreign exchange markets further reflects the market's cautious attitude towards the quality and durability of economic recovery. The article concludes by suggesting the need for enhanced macroeconomic policy support to stabilize domestic demand and price expectations, to prevent long-term low inflation from stifling innovation, and to balance short-term demand recovery with long-term structural transformation.
1. Technology Sector Leads the Way, While Traditional Industries and Real Estate Lag Behind
Economic recovery is not a uniform process; some sectors are advancing faster than others:
- Exports: Export growth in the first half of the year was 17.6%, with the technology sector contributing approximately two-thirds of this growth. For example, exports of integrated circuits contributed 4.8 percentage points, and those related to AI servers contributed 2.3 percentage points; in contrast, exports from traditional industries were sluggish, demonstrating a clear structural disparity.
- Investment: Overall fixed asset investment decreased by 5.7%, with real estate investment being the main drag. However, investment in the technology sector continued to grow rapidly—investment in high-tech information services increased by 15.5%, and in the electronics manufacturing industry by 6.5%. This indicates that technology is growing against the trend, while traditional industries and real estate are still holding back.
2. CPI and PPI Show Temporary Improvement, but Lack Momentum
Although price indicators have improved, they lack a solid foundation and may decline again soon:
- CPI: In June, it rose by 1% year-on-year (for the fifth consecutive month), mainly driven by external factors such as rising international gold prices, increased energy costs due to conflicts in the Middle East, and higher demand for AI chips. These factors are temporary: gold prices have begun to fall, and the impact of Middle East conflicts is diminishing, so CPI may drop back below 0.5% by the end of the year.
- PPI: In June, it rose by 4.1% year-on-year, but price increases were mainly concentrated in the upstream sectors (such as mining and raw materials), while prices of consumer goods downstream remained negative. This uneven distribution suggests that PPI may decline month by month.
3. Capital Markets Signal Pessimism about Economic Recovery
The performance of bond, stock, and foreign exchange markets reflects the market's true view of the economy:
- Bond Market: Under normal circumstances, when economic growth is fast (high nominal GDP), government bond yields should rise (as investors prefer to invest in the real economy and buy bonds, reducing demand and thus increasing yields). However, in the second quarter, nominal GDP grew by 5.9%, yet the yield on 10-year government bonds fell to around 1.7%, indicating that institutional investors doubt the sustainability of this growth and prefer to buy safe bonds as a hedge.
- Stock Market: The Shanghai Composite Index appears stable, but there is extreme differentiation within it: the technology sector is performing well, while traditional consumer and livelihood-related sectors (such as the CSI Consumer Index) are struggling, returning to levels from September last year. This mirrors the "K-shaped divergence" in the real economy—markets are optimistic about the prospects of the technology sector but not so much for traditional industries and consumption.
- Foreign Exchange Market: The nominal appreciation of the RMB is not arbitrary but a correction of previous "real depreciation." Due to China's large trade surplus (more exports than imports), the exchange rate should theoretically rise. However, low inflation domestically led to a "real effective exchange rate" (considering prices) that was actually depreciating. The current nominal appreciation is an adjustment to this imbalance.
4. More Policy Efforts Needed to Avoid the Negative Impact of Low Inflation on Innovation
The sustainability of economic recovery is in doubt, and policy intervention is required, especially to address the issue of low inflation:
- Why is low inflation a problem? Corporate innovation requires long-term investment and confidence in the future. Low inflation implies that future economic prospects are bleak (people value money more and are less willing to spend on investment), which can deter innovation. Japan's experience with prolonged low inflation shows that this can lead to economic stagnation and missed opportunities for technological revolutions, such as those in internet and new energy vehicles.
- What should policies do? The focus should be on expanding domestic demand (to encourage spending), stabilizing price expectations (to prevent persistent deflation), and improving the business environment. Only with stable economic growth can the high growth of the technology sector translate into job creation and consumption, creating a virtuous cycle.
The main message of this article is that the "structural divergence" and "lack of sustainability" in economic recovery are the current major challenges. Policy actions are needed to bridge these gaps and stabilize expectations, enabling innovation-driven growth to continue on its course.