Our economic outlook for China

China’s economic growth slowed to 4.3% year over year in the second quarter, falling short of market expectations. Weak domestic demand and moderating fiscal support outweighed continued strength in industrial production, particularly in technology-related sectors benefiting from resilient exports. June activity data further underscored the widening divergence between supply and demand.

One encouraging development was the return of the GDP deflator—a broad measure of inflation—to positive territory for the first time in three years, partly reflecting higher energy prices associated with the Middle East conflict. Renewed tensions in the region have increased the risk that oil prices could remain elevated for longer.

Still, an energy shock alone is unlikely to end China’s deflationary pressures or put the economy on a Japan-like reflationary path, given China’s lower energy exposure, more resilient currency, limited corporate pricing power, and continued labor market slack.

Looking ahead, export demand is likely to remain relatively firm in the near term, supported by the global AI investment cycle. However, exports alone cannot generate a durable and broad-based recovery. That will require quicker fiscal execution and stronger demand-side policy support. Without such measures, domestic demand is likely to remain subdued, and the economy’s increasingly K-shaped recovery will persist.

On policy, we expect support to remain targeted, incremental, and focused on implementation. The Politburo meeting in July reinforced our view that policymakers will prioritize accelerating existing fiscal measures, improving the transmission of previously announced policies, and making fuller use of available policy space, rather than launching a large-scale, broad-based stimulus package.