China, Red Alert for Second-Half Economy
Consumer Sentiment in Freefall amid Prolonged Property Slump
Sole Growth Engine, Exports, on the Brink

China’s economic recovery in the second half of the year is flashing red. The fallout from escalating trade tensions with the United States is now fully materializing, weighing on production and investment, while mounting uncertainty has prompted consumers to tighten their wallets. As consumption, output, and investment indicators deteriorate in tandem, the jobless rate, which had shown signs of stabilizing, has resumed its climb. Without a swift rollout of aggressive domestic stimulus, analysts warn that the downturn will accelerate in the coming months.

Retail Sales Sink to Year’s Low, Industrial Output Contracts

According to China’s National Bureau of Statistics and the Customs Administration on the 18th, key indicators such as July industrial output, retail sales, and fixed-asset investment all fell short of market expectations. Industrial production, a long-standing pillar of China’s growth, rose only 5.7% year-on-year in July, the weakest pace in eight months and below both June’s 6.6% and the market consensus of 5.9%.

Retail sales, a barometer of domestic demand, were equally disappointing. July retail sales climbed just 3.7% from a year earlier, marking the smallest increase since November last year and trailing both June’s 4.8% and the forecast of 4.6%.

Fixed-asset investment excluding rural households rose only 1.6% in the January–July period from a year earlier. For July alone, investment plunged about 5.3% year-on-year, the sharpest contraction since the onset of the COVID-19 pandemic in early 2020. Real estate was the hardest hit, with property development investment dropping 12% year-on-year in the first seven months—the steepest decline in the past year. Meanwhile, unemployment is edging higher again. With a record number of college graduates entering the labor market this summer, the national urban jobless rate climbed to 5.2% in July, up 0.2 percentage points from June.

Exports Falter, Domestic Demand Insufficient to Offset Losses

Experts note that although Washington and Beijing pledged a tariff truce through November, the impact on China’s exports is becoming pronounced. With trade tariffs biting and domestic weakness compounding the strain, signs of a looming recession are unmistakable. Despite a 90-day extension on tariff suspensions, U.S. duties on Chinese goods remain elevated. According to an August report by Global Trade Alert, Chinese exports to the United States still face an average effective tariff burden of around 43.5%, after accounting for differentiated rates by product.

In the first half, export performance was buoyed by front-loaded demand during the temporary suspension of reciprocal tariffs, allowing GDP to expand 5.3% year-on-year. But as the tariff shock takes hold in the second half, growth momentum is fading fast. Lim Ho-min, senior macro strategist at Lombard Odier, remarked, “The latest slump in China’s indicators confirms that a tariff-induced recession has begun.”

Proponents of the view that China could weather the trade war had long argued that exports to the U.S. account for only a minor share of GDP and total shipments. Indeed, China’s exports to the U.S. stood at $438.9 billion last year, equivalent to just 2.5% of its $17.79 trillion GDP. The U.S. share of China’s total exports has already shrunk from 19.2% in 2018 to 14.7% last year. On this basis, some analysts contended that if Beijing could boost domestic consumption—which contributes 45% of GDP—by even 5–10%, it could absorb the shock even if Washington doubled its tariffs.

Beijing itself has emphasized “domestic demand stimulation” as a strategic priority amid escalating rivalry with Washington. In the March Government Work Report presented at the “Two Sessions,” the term “consumption” appeared 32 times. Days later, on March 17, the State Council unveiled a 30-point “Special Action Plan for Consumption Promotion,” including subsidies for automobiles, household appliances, and smartphones. The initiative was described as the most sweeping consumption-boosting package since China’s reform-and-opening era.

Deflation Erodes Growth Perceptions

Yet such measures have so far failed to gain traction, undercut by deflation—the prolonged price stagnation now seen as one of China’s most serious risks. Deflation, historically without precedent as a long-term economic pitfall, is eroding nominal growth and masking real economic momentum.

China’s GDP grew 5.2% year-on-year in the second quarter, but nominal GDP expanded only 3.9%, the weakest pace since 2023. Because nominal GDP reflects both inflation and deflation, the gap between nominal and real GDP growth is widening. The GDP deflator contracted 1.3% in the second quarter, marking the ninth straight quarter of negative readings since Q2 2023.

A report by the National Institute for Finance and Development noted, “Prices are the thermometer of livelihoods. The slowdown in nominal growth is preventing households and firms from truly perceiving economic expansion.” Although Beijing continues to report real growth rates near 5%, both domestic and foreign observers remain skeptical—largely because nominal growth has slipped to the 4.2% range since late 2023. “The disconnect between macro indicators and micro-level perceptions is likely to widen further,” the report cautioned.

This disconnect is feeding into another pressing challenge: the surge in government debt. Even as authorities cut interest rates, households and corporations remain unable to generate sufficient cash flow or reinvest effectively, leaving the state to absorb imbalances and losses by expanding its liabilities. According to the report, household and corporate debt in the second quarter rose 3.0% and 6.9% year-on-year, respectively, still near historical lows. By contrast, government debt soared 21.1% from a year earlier—the fastest pace since 2021.