H2 macro outlook: New drivers of China's growth

Looking ahead to China's economy in the second half, robust exports are expected to remain an important driver of economic growth, while domestic demand will generally remain stable. PPI inflation is expected to remain elevated, while CPI inflation is likely to stay moderate. As prices continue to recover, the full-year GDP deflator is expected to reach 1.1 percent.

GDP growth is expected to dip before recovering in the second to fourth quarters, with expansion forecast at 4.5 percent, 4.6 percent and 4.8 percent, respectively. We forecast China's full-year real GDP growth at 4.7 percent, with nominal GDP growth at 5.8 percent. USD/CNY could hover around 6.7-6.8 this year, supported by China's current account surplus and stronger corporate willingness to convert foreign-exchange receipts.

On the domestic macro front, imports and exports remain key drivers of growth. We expect China's foreign trade to stay resilient in the second half of 2026, supported by multiple factors including the global AI investment cycle. First, the continued capital spending cycle among overseas cloud providers is turning computing-power-related goods into an increasingly important driver of China's trade growth. According to China customs statistics, China's integrated circuit exports rose 83.7 percent year-on-year in the first four months, making a notable contribution to overall trade growth. We expect this support to persist in the second half. Second, elevated crude oil and natural gas prices caused by the Middle East conflict are likely to further boost global demand for new energy products. As a major producer of photovoltaic products, electric vehicles and lithium batteries, China continues to benefit from this trend. Third, China's relative cost advantages in manufacturing are set to widen. With oil and gas accounting for a lower share of its energy mix than in the European Union, Japan, South Korea and ASEAN economies, China is relatively less vulnerable to energy-price shocks, which could further strengthen the cost competitiveness of its manufacturers. Fourth, import growth is also expected to remain elevated in the second half, supported by stronger semiconductor supply-chain imports driven by rising AI computing demand, as well as higher import values for upstream commodities such as nonferrous metals, oil and gas amid price gains. Overall, we forecast China's full-year export and import growth in 2026 at around 13.2 percent and 15.5 percent, respectively.

On the consumption front, retail sales growth, particularly goods consumption, is likely to remain subdued this year as subsidies are phased out, front-loaded demand fades, household income growth remains tepid and household balance-sheet repair falls short of expectations, weighing on consumers' willingness to spend. Services consumption, however, is expected to emerge as a structural bright spot in household spending this year, underpinned by policy support. Special treasury bond funding for this year's consumer goods trade-in program is slightly lower than the amount allocated last year. We estimate that subsidy funding in the first and second halves will amount to 77 percent and 91 percent of year-earlier levels, respectively, creating a modest drag on retail sales growth. At the same time, property-sector weakness could continue to weigh on household balance-sheet repair and consumer confidence, while persistent pressure on income growth is likely to curb households' willingness to spend. Taken together, we expect retail sales — particularly goods consumption — to remain on a weak recovery path in the second half, with full-year growth likely at around 2.5 percent. Compared with goods consumption, services consumption is more experience-driven and tends to benefit from continued upgrading and repeat demand. With household consumption patterns shifting and policy support increasing, services consumption is likely to become an increasingly important driver of overall consumption growth.

On the investment front, fixed-asset investment growth is expected to stay slightly positive in 2026, as tighter "anti-involution" policies limit inefficient capacity additions and property investment continues to drag. Structurally, investment is likely to feature a steady growth in infrastructure investment, weak manufacturing investment and a continued but narrowing drag from real estate development investment. For infrastructure investment, the combination of limited fiscal resources for the remainder of the year and a shrinking pool of project reserves suggests that the second quarter could be a near-term trough in growth. Infrastructure investment growth is expected to recover sequentially in the second half. For manufacturing investment, it is expected that the strong momentum in AI-related sectors and the overall improvement in corporate profits will support a moderate increase in manufacturing investment growth. However, as anti-involution policies continue to be rolled out, manufacturing investment is likely to post only modest positive growth for the full year. For property investment, the decline in real estate development investment is expected to narrow further.

On the price front, "imported inflation" is expected to keep China's PPI elevated, while CPI inflation is likely to remain moderate. The year-on-year growth gap between PPI and CPI may therefore persist. Judging from the performance of key commodities, higher crude oil prices driven by Gulf tensions have been the main driver of China's rapid PPI increase since March. Regardless of how the conflict evolves, crude prices are unlikely to return to pre-conflict levels in 2026, and should continue to provide upward support to China's industrial goods prices. Under our base-case scenario, PPI inflation is expected to rise by around 2.3 percent in 2026. CPI inflation is expected to remain moderate this year, with the annual rate likely to come in at around 0.8 percent in 2026 under our base-case scenario.

In terms of fiscal and monetary policy, China's fiscal spending and government bond issuances have been front-loaded in 2026. In the second half, efforts to clear overdue payments, advance the "Six Networks" initiative (including water networks, new-type power grids, computing power networks, next-generation communication networks, urban underground pipeline networks and logistics networks), and increase livelihood-related spending are expected to become key channels for optimizing the allocation of fiscal funds. Regarding monetary policy, we believe that under the base-case scenario, China is unlikely to cut interest rates or the reserve requirement ratio this year.

The writer is chief macro and policy analyst, CITIC Securities Research Department.

The views do not necessarily reflect those of China Daily.