Summary of Key Points
In the second quarter of 2026, Chinese companies gradually adjusted their business operations in response to external shocks: overall economic momentum slightly declined but remained within an expansionary range (above the boom-bust line). Production levels returned to those of the first quarter, cost pressures eased significantly, and corporate investment activities increased subtly, albeit with caution regarding the broader economic environment. However, slower inventory reduction and restrained credit usage have become concerns that require attention. The key to economic recovery in the second half of the year lies in whether prices can be stabilized, inventory can be sold off, and investment can continue.
1. Production Has Returned, Cost Pressures Have Reduced – Companies Finally Can Breathe Easy
In the first quarter, soaring raw material and energy prices put significant strain on companies, prompting them to cut production (the Production Volume Diffusion Index dropped from 53 to 45). By the second quarter, the situation improved: cost increases slowed down (the Unit Cost Index fell from 72 to 64, and the Raw Material Cost Index also dropped from 74 to 64), leading companies to resume orders and production. The Production Volume Index rebounded to 53, almost making up for the previous contraction.
In terms of prices, although the increase was smaller than in the first quarter (the Price Index fell from 56 to 52), they remained above the boom-bust line, indicating that companies could still pass on some of the cost increases to their customers. This new balance allows them to avoid losing profits due to high costs or driving away customers due to price hikes, thus enabling them to find a balance among costs, prices, and orders and reorganize their production schedules.
2. Cautious in Words, but Honest in Actions – Companies Are Quietly Increasing Investment
There is an interesting contradiction in the second quarter: companies remain cautiously optimistic about the investment environment (the Investment Timing Index stayed at 48, below the boom-bust line), yet the actual amount of investment increased – the proportion of companies making fixed asset investments rose from 18.7% to 22.2%, and the proportion of those engaging in expansionary investments (such as purchasing new equipment or expanding capacity) increased from 16.8% to 19.8%.
Why is this? Companies have a clear strategy: despite the uncertainties in the broader economy, they see improvements in costs, progress in Sino-US economic negotiations (such as tariff delays and achievements in agriculture), and stable policies. Therefore, they prioritize investments that can enhance efficiency, such as upgrading equipment and implementing automation. These investments help companies prepare for future risks, so their actions speak louder than their words.
3. Slower Inventory Reduction – A Hidden Concern Behind Production Recovery
The recovery of production is a positive development, but it comes with a risk: the time required to sell off inventory has lengthened. On the surface, the proportion of companies with finished product inventory decreased from 63.1% to 61.2%, suggesting less inventory. However, the proportion of companies whose finished product inventory takes more than three months to sell increased sharply from 5.7% to 15.7%. This indicates that although fewer companies have inventory, those that do have it are facing longer sales periods.
This suggests that while production has resumed, demand has not fully caught up. If consumer and external demand, or industrial orders, do not increase, the excess inventory could lead to further production delays and hinder future growth.
4. Investing Without Borrowing – Companies Have Become More Cautious
In the past, companies relied on loans and leverage for expansion, but this was different in the second quarter: only 2% of companies took out new loans, similar to the first quarter. Banks are still willing to lend (the Bank Lending Attitude Index is at 96, a high level), but companies prefer to use their own cash flow and existing funds for investment.
Why? After experiencing cost shocks, companies are more cautious about increasing their debt levels, fearing that they might not be able to handle additional risks. Sustainable expansion does not rely on heavy borrowing; instead, it involves balancing cash flow, equipment efficiency, and order structures to build a solid foundation.
5. What to Expect in the Second Half of the Year? Three Key Factors Determine Economic Outcomes
The success of companies in the second half of the year depends on three factors:
1. Can Prices Be Stabilized? As long as the Price Index remains above 50, companies can continue to pass on cost increases and gradually recover profits. If prices fall below the boom-bust line, profits will be at risk.
2. Can Inventory Be Sold Off? Production recovery is just the first step; securing orders and selling off inventory is crucial. Faster inventory reduction indicates that demand is catching up, turning production growth into solid expansion. Otherwise, inventory pressures could undermine production.
3. Can Investment Continue? If investments in fixed assets and expansionary activities continue to rise, it shows that companies are preparing for the future (e.g., investing in new technologies and automation). As long as global liquidity does not tighten suddenly (the Federal Reserve maintains interest rates) and domestic prices remain stable, companies will have the motivation to invest.
Overall, the environment in the second half of the year is not easy (geopolitical tensions, the dollar, and energy prices could all pose challenges), but if these three factors remain stable, the economic recovery in 2026 can be more robust.
(Note: The boom-bust line is set at 50; an index above 50 indicates positive conditions for most companies, while below 50 indicates negative trends. The Diffusion Index measures the proportion of companies experiencing improvement; higher values are better.)