China: Demand trails supply

Research evidence excerpt

China: Demand trails supply

Barclays | China

We note that in contrast to still above-4% GDP growth, we estimate the weighted average of

demand indicators (retail sales, FAI and exports), deflated by the simple average of CPI and PPI,

fell 3.6% y/y in Q2 after expanding 3.4% in Q1 (Figure 6). In our view, the large gap between GDP

and demand indicators reflects: 1) China's GDP growth is production based; and 2) the

slowdown in IP and services production is much milder than the slowdown in demand

indicators. We think the sharp deterioration in domestic demand reflects payback from

front-loaded fiscal stimulus and a weakening credit impulse, and structural constraints

associated with the K-shaped growth pattern.

H2 growth outlook: momentum to remain weak in Q3 before recovering in

Q4

We expect a typical intra-year pattern to persist: a strong early-year rebound, moderation in

Q2–Q3 as fiscal effects fade, followed by a policy-supported pickup in Q4 to meet the annual

target (Q3E: 4.1% q/q saar, Q4E: 4.9%). We note that the positive effects of previously

announced policies are still unfolding. In particular, the CNY800bn new financing tool (vs

CNY500bn in 2025) had not yet been deployed as of H1. We expect disbursements to commence

in H2, providing incremental support to growth. On a quarterly basis, growth momentum is

likely to remain weak in Q3 before recovering in Q4 as additional stimulus kicks in. Our 2026 full-

year GDP growth forecast of 4.5% is underpinned by three key rationales.

• First, China’s exports have consistently exceeded market expectations year to date, partially

offsetting weakened domestic demand. We expect exports to continue to benefit from the

global AI capex investment cycle and the ongoing global energy transition, providing an