Westpac's Elliot Clarke says China's domestic businesses and households need immediate, pro-active support, because their economy is struggling to grow without export demand

By Elliot Clarke*

Q2 GDP and the June activity data provided a mixed read on China’s economy. Q2 GDP met expectations in the quarter at 0.9%, but the annual rate disappointed, coming in at 4.3%yr. Year-to-date, growth is on track to meet our expectation of 4.7% ytd; however, that rate is towards the bottom of authorities’ 4.5%-5.0% full-year guidance.

Delving into the detail, it is evident the industrial sector continues to drive aggregate momentum. Having dipped near 4.0%yr in April and May, growth in industrial production rebounded to 5.3%yr in June, keeping the year-to-date pulse at 5.4%.

High-tech manufacturing categories such as integrated circuits (18.8%yr) and industrial robots (28.1%yr) are behind the recent gains, while motor vehicle production is unchanged over the year (-0.2%yr). Note though, within the vehicle category, production of new-energy vehicles is up 29.4%yr.

This rotation towards high-tech manufacturing is likely a negative for employment given the level of automation used in new factories, so too the relocation of assembly work to neighbouring nations –mobile phone production was down 13.5% yr in June. For aggregate activity though, the integration of Asian production and trade combined with rapid technological development continues to produce significant net gains for the trade position, 27% yr growth in exports and a 36% yr gain for imports leaving the monthly trade surplus at USD126 bln in June – just inside January 2025’s record high and a multiple of the surplus prior to the pandemic.

The domestic growth story remains downbeat overall, primarily due to declining investment.

Fixed asset investment’s contraction accelerated in June to -5.7%ytd from -4.1%ytd in May. Mining and transport-related investment have grown year-to-date, but manufacturing and utilities investment remain in a lull after years of rapid growth; meanwhile, healthcare, education, recreation and, of course, property investment continue to decline at a rapid rate.

Property investment’s 18% ytd fall is arguably most notable, coming after a -11.2% ytd, -10.1% ytd and -7.9% ytd result in June 2025, 2024 and 2023 respectively and despite significant support from authorities over the period. Further material losses are likely given residential property sales were down 13.7% ytd in June and as prices are yet to stabilise – new and existing home prices fell 0.15% and 0.32% respectively in the month.

For the consumer though, there are some emerging positives. Having disappointed earlier in 2026, annual growth rebounded from -0.6%yr to +1.0%yr in June, leaving sales 1.3% higher year-to-date. Spending by category was mixed, in part due to volatility created by several past incentive programs. The property sector’s decline also continues to weigh heavily on demand for construction goods and appliances, although there was some evidence of accelerating discretionary spending, likely aided by equity market gains over the past year and a half and broadly stable labour markets across the major cities and immediate surrounds.

All told, Q2 GDP and the June partial data highlight China’s economic resilience and also give a degree of hope that domestic demand will strengthen over the coming year(s), as authorities intend. That said, as we have recently discussed, there remains a clear disconnect between the income generated by China’s major exporters and the financial prospects of the average Chinese household. Until the returns of trade are distributed more equitably to households, through wages, taxes and wealth gains, Chinese authorities need to fill the gap.

Following such significant declines across essential local infrastructure, and with confidence impaired, today there is little risk of wide-spread capital misallocation or speculative excess. Pro-active support in scale via the local governments and state-owned entities is therefore the best course to speed aid. As the property sector stabilises and businesses recognise a broadening uptrend across the domestic economy, the private sector will also contribute. Our 4.7% ytd expectation for 2026 remains in place but, in the absence of immediate stimulus, is likely to become a stretch target.

*Elliot Clarke is Head of International Economics at Westpac.