China’s economic momentum stays weak as consumption falters

CHINA’s consumer spending and investment languished in August, even as industrial output improved more than expected, adding pressure on officials to step up support for the economy.

Retail sales rose 0.4 per cent from a year ago, worse than the consensus forecast for a 0.8 per cent gain by economists in a Bloomberg poll, and down from 0.6 per cent in July.

Fixed-asset investment plunged 7.2 per cent in the first eight months from the same period in 2025, slightly more than expected. The jobless rate surprisingly ticked up.

In contrast, industrial output climbed 5.2 per cent in August, exceeding expectations and accelerating from July’s 4.5 per cent gain.

Double-digit growth in exports is largely behind the uplift, as hundreds of billions of dollars flow into the global buildout of data centres and drive up demand for artificial intelligence-related products such as integrated circuits.

The widening divergence between domestic and external demand shows that the rapid expansion in China’s high-tech industries has yet to translate into better incomes and confidence among households. Overall economic growth likely improved little in August from July, though officials could feel emboldened by surging exports and look beyond weakness at home.

“The risk is that policymakers become complacent and fail to introduce sufficient counter-cyclical measures to support domestic demand,” said Carlos Casanova, senior economist for Asia at Union Bancaire Privee. That could “leave China trapped in a structural cycle of high savings, weak consumption and persistently low growth.”

The yuan was steady in onshore and offshore markets after the data release and the yield on the government’s 10-year bond was little changed at 1.68 per cent. The Chinese currency has outperformed its regional peers in the past five days despite the US dollar’s rebound, as the People’s Bank of China set the daily fixing at a stronger level.

China’s National Bureau of Statistics (NBS) spokesman Fu Linghui said the latest figures showed “the economy was overall stable.” Speaking at a briefing in Beijing, he warned, however, over the negative impact from overseas conflicts and the imbalance between strong supply and weak demand.

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Barclays, Oxford Economics and Macquarie Group estimate gross domestic product will expand 4.3 per cent from a year ago in the third quarter based on July and August numbers. That means growth is increasingly at risk of falling below the official annual target of 4.5 to 5 per cent for a second straight quarter after decelerating sharply in April-June.

Unless momentum improves in the coming months, policymakers are likely to face growing pressure to deploy additional stimulus. And while Beijing is starting to dial up fiscal policy, reversing the decline in government expenditure and channelling the money into the broader economy may take time.

The economy is also confronting external shocks that are widening the divergence among industries and complicating the policy outlook. Global oil prices have surged back above US$100 a barrel as tensions in the Middle East intensify, squeezing downstream industries.

An overhaul of real estate policy aimed at dismantling the country’s so-called pre-sale model is likely to weigh further on property investment and local government finances in the coming months. The measure essentially delays developers’ access to mortgages to strengthen protections for homebuyers, likely curbing builders’ appetite for expansion as the industry grapples with a prolonged liquidity squeeze.

“Overall, it seems like it’s broadly stable, maybe a bit worse in August than July,” said Lynn Song, chief economist for Greater China at ING Bank.

Property investment slumped 19.9 per cent in the first eight months of this year from a year ago, deepening its decline. The urban jobless rate unexpectedly rose to 5.3 per cent from 5.2 per cent in July.

The historic fall in investment that began in mid-2025 shows no signs of abating, as businesses turn pessimistic. The average profit margin among manufacturers stood at 4.9 per cent in July. While that is an improvement from a year ago, it is still down from as high as 6.7 per cent in 2021.

Hopes for any rebound in investment are tied to the construction on the Six Networks, a government programme covering the buildout of data centres, power grids, ultra-high-speed fibre broadband and waterways.

Projects related to the multi-trillion yuan initiative offered a rare bright spot in China’s infrastructure spending in 2026. Capital spending on information transmission soared 28.4 per cent in January-August, up from 26 per cent in the first seven months. It rose 14.7 per cent in waterway transportation, versus 16.2 per cent in the period through July.

The continued plunge in car sales was again the biggest drag on consumer spending, with auto sales plummeting 18.5 per cent in August from a year ago. Excluding cars, retail sales grew 2.5 per cent in August, the same pace as in July. The phasing out of car purchase subsidies in 2026 weighed on consumers, who are also contending with a worsening job market and falling property values.

“Thanks to exports, China’s factory activity is holding up,” Raymond Yeung, ANZ’s chief economist for greater China. “But investment is falling faster, not to mention the persistent weakness in retail sales. Domestic demand is very weak. The economic momentum is clearly uneven across sectors.” BLOOMBERG