Macro Crossroads | 2026 H1 Macro Review

Prof. Zhu Ning

China’s economy grew by 4.3 percent year-on-year in the second quarter of 2026, marking its slowest pace in more than three years and raising concerns about a broader economic slowdown. Looking at the first half as a whole, however, GDP still expanded by 4.7 percent, broadly in line with the government’s full-year growth target of 4.5–5 percent set during the “Two Sessions” in March.

For policymakers, what matters more than fluctuations in any single quarter is whether the overall trajectory of the economy remains on track. Rather than focusing solely on the second-quarter slowdown, it is more useful to examine the key forces that supported China’s economy in the first half of the year.

Foreign trade continues to drive China’s economic growth. In the first half of 2026, China’s total goods imports and exports increased by 16.9 percent to RMB25.47 trillion, exceeding RMB25 trillion for the first time in any first-half period. China’s exports grew by a strong 13.4 percent, while imports rose by an even faster 22.1 percent, helping to make China’s trade more balanced.

Part of China’s strong trade performance in the first half of 2026 can be attributed to its ability to manage supply-chain disruptions resulting from the conflict in the Strait of Hormuz. Backed by its comprehensive industrial supply chain, China continued to provide high-quality, affordable products to meet global demand.

Domestically, the focus on new higher-value growth industries has become a major force driving China’s economy forward. Kimi K3 was released as one of the world’s largest open-weight AI models, allowing developers to download, modify, and run it on their own infrastructure. Developed by Chinese startup Moonshot, the 2.8 trillion-parameter model is closing in on leading American rivals. Around the same time, Chinese memory-chip giant Changxin Memory Technologies (CXMT) made its stock-market debut. The company raised RMB57.9 billion in the largest A-share IPO of 2026 and the largest-ever fundraising by a mainland Chinese semiconductor company. Its shares surged on their first trading day, briefly making it the most valuable company listed on the mainland market. The deal marked another accomplishment for China in the global race for next-generation technology, while also boosting investor confidence and creating additional wealth that could support future investment.

The performance of property markets in some first-tier Chinese cities reflected some of this confidence and success. The market for high-end new homes attracted strong buyer interest during the first half of the year, five years after the national housing market went into correction. This is not only good news for the housing market, but also helps alleviate concerns regarding broad-based price deflation and supports confidence in the future.

Signs of stabilization in selected housing markets, together with strong technology-stock performance, have generated a much-needed wealth effect. There is some evidence that this is helping to cushion sluggish consumption. The newly released aggregate measure of retail sales of goods and services increased by 2.7 percent in the first half of 2026. While retail sales of goods increased by only 1.1 percent, retail sales of services grew at a relatively healthy rate of 5.3 percent.

In the meantime, investment remains weak. National fixed-asset investment dropped by 5.7 percent, largely dragged down by an 18 percent decline in property investment. Consumption and investment growth remain constrained by weak confidence, the prolonged property downturn, subdued private-sector expectations and the lingering effects of pandemic-era disruptions. As with many other parts of the economy, both will depend heavily on further policy support.

China’s general public budget revenue rose by 4.7 percent to RMB12.1 trillion in the first half of 2026, while general public budget expenditure increased at a much slower pace of 1.5 percent to RMB14.3 ⁠trillion. This relatively slow pace of expenditure growth is somewhat surprising, given the “proactive fiscal policy” announced by the government at the Two Sessions earlier this year. Tighter regulation of debt issuance, the restructuring of existing local-government and local government financing vehicles (LGFV) debt, and ongoing anti-corruption investigations, however, all have slowed the pace of new debt issuance and the launch of new government projects.

The Politburo meeting in July reviewed these economic developments and made some adjustments to economic policy for the second half of the year, as is customary at its July meeting. Given that economic growth is largely in line with the growth target, the meeting did not introduce any overly aggressive stimulus measures for the second half. Instead, faster issuance and deployment of government bonds, accelerated launches of new projects and implementation of existing ones, and a continued focus on new higher-value growth industries and domestic consumption are high on the agenda.