The economy slowed further in July: domestic demand remains weak while exports alone prop up growth—will stimulus still be needed to stabilize growth in the second half?

Please remember to like and share! If you haven’t followed us yet, please subscribe to the ‘Mars Macroeconomics’ account—thank you! Executive Summary: Economic data for July 2026 fell broadly short of expectations: retail sales grew by just 0.6%, fixed-asset investment declined further to −6.7%, and real estate investment plunged 19.2%. Industrial output growth slowed to 4.5%, while exports stood out as the sole bright spot—rising 23.9% in U.S. dollar terms. The unemployment rate rose to 5.2%, and CPI dropped to 0.5%. The stark contrast between sluggish domestic demand and robust export performance has intensified structural imbalances in the economy; however, large-scale stimulus measures are unlikely in the near term. Data released by China’s National Bureau of Statistics (NBS) on August 17 show that the Chinese economy overall lost momentum in July 2026. Although industrial production and exports posted modest gains, they failed to offset the collapse in domestic demand. Consumption stagnated, investment slid further, and unemployment climbed—leaving the economy facing severe headwinds right from the start of the second half. I. Slowing consumption: domestic demand remains the economy’s weakest link. In July, total retail sales of consumer goods rose only 0.6%, markedly slower than June’s 1.0%. Excluding automobiles, growth stood at just 2.5%, also below the previous month’s figure. According to NBS data, total retail sales for January–July amounted to RMB 28.7744 trillion, up 1.2% year-on-year—a sharp drop compared with last year’s 5% growth. Consumption weakness manifested across multiple sectors. Passenger vehicle sales plummeted 21% in July, and auto retail sales growth decelerated by 0.9 percentage points month-on-month. As automobiles account for roughly 8% of total retail sales, their slump epitomizes the broader malaise in consumer markets. Home appliances, furniture, and building materials—all linked to the property sector—posted year-on-year declines. Communications equipment was one of the few bright spots, with growth accelerating from 16.5% in June to 20.4% in July; however, this surge was largely driven by pre-buying ahead of rising memory chip prices—not a genuine recovery in underlying demand. Nominal consumption growth for the first half of the year plunged from 5% year-on-year in the same period last year to just 1.3%. Government subsidies for trade-in programs prematurely exhausted household purchasing power, turning into a drag thereafter. Data from the People’s Bank of China show that household loans—including mortgage loans—contracted again in July after a brief rebound in June, reflecting persistent softness in the housing market and labor market conditions undermining consumer confidence. Fu Linghui, an NBS spokesperson, acknowledged that key economic indicators had slowed last month. Although service-sector retail sales grew 5% for the first seven months—outpacing goods retail growth of 1.1%—the scale of service consumption remains insufficient to reverse the overall downward trend in consumption. II. Investment and the real estate market: deepening domestic demand weakness. Deteriorating investment data are deeply concerning. Nationwide fixed-asset investment (excluding rural households) totaled RMB 26.0328 trillion from January to July, down 6.7% year-on-year—the decline widening by one percentage point versus the first half. All three major investment categories posted declines: infrastructure investment fell 3.6%, with the contraction deepening by 1.2 percentage points; manufacturing investment dropped 1.7%; and real estate development investment plunged 19.2%. In July alone, real estate investment contracted 27.4% year-on-year—the single largest drag on overall investment. The real estate market situation is especially dire. From January to July, national real estate development investment stood at RMB 430.09 billion, down 19.2% year-on-year—the decline widening further from 18% in the first half.

Luo Tianhao: China’s Economy—The Apex and the Foundation

A tale of two extremes. In July 2026, Bloomberg’s Billionaires Index updated its rankings: Liang Wenfeng, founder of DeepSeek, ranked as the world’s wealthiest entrepreneur in the AI large-model field, with a net worth of $36 billion. His wealth surged $19.9 billion—over 120%—since the start of the year. On the same list, Chen Tianshi, founder of AI chip firm Cambricon, ranked 61st globally with $37.4 billion. Two Chinese AI founders now stand shoulder-to-shoulder among the world’s top 70 billionaires. This is China’s economic apex—dazzling, fierce, commanding global attention. Yet during this same period, another set of figures quietly emerged: China’s flexible employment workforce reached 280 million in 2025 and is projected to rise to 320 million in 2026—accounting for over 40% of urban employment. This means nearly half of all urban workers are in flexible employment—without long-term contracts, stable social security coverage, or predictable futures. This is China’s economic foundation—vast, silent, bearing the livelihoods and anxieties of hundreds of millions. Apex and foundation coexist under the same sky—yet seem worlds apart. (1) China’s AI ascent is exhilarating. DeepSeek completed its first external funding round, raising approximately $7.4 billion, valuing the company at $50 billion post-money. AI-related products have become the most critical pillar supporting China’s exports. Global AI capital expenditures and the semiconductor cycle are rebounding, and China’s export share remains at a historically high plateau. Yet simultaneously, China’s economy exhibits a stark ‘tale of two extremes’. In the first half of 2026, export growth hit 13%; in June alone, it surged to 27%. Domestic demand, however, remained persistently weak: total retail sales grew only 1.3% year-on-year in the first half; fixed-asset investment fell 5.7%—the steepest drop since 2020—and real estate development investment plunged 18%. GDP growth in Q2 slowed to 4.3% year-on-year, down from 5% in Q1—the weakest quarterly expansion in three and a half years. Exports soar; domestic demand freezes. Luo Tianhao argues that China cannot sustain its entire economy on exports alone. (2) Certain industries and firms lift GDP figures—but far more real-economy enterprises struggle. In 2025, nationwide fixed-asset investment totaled RMB 48.52 trillion, down 3.8% year-on-year. A survey of 1,740 private enterprises found that 54.8% considered operations ‘relatively difficult’, and 20.7% deemed them ‘extremely difficult’—a combined 75.5%. In the first half of 2025, only 28.9% of surveyed firms reported revenue growth, while 47.4% saw revenues decline; fewer than 20% reported profit growth. A striking 71% said ‘cutthroat, zero-sum competition within their industry is severe.’ The core challenge confronting small and micro enterprises today is insufficient end-market demand. Demand deficiency—not inadequate technology, nor uninnovative business models—but simply no one buying.

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