3 key questions for China’s second half of 2026
The desk posits that China's economic divergence is set to continue into the second half of 2026, with persistent gaps between domestic demand and external performance. According to the report, the People’s Bank of China (PBoC) may be under pressure to reevaluate its policy framework to stimulate domestic growth, weighed down by a sluggish property market and slowing wage growth. Per the full note source, a critical aspect will be whether the PBoC enacts measures to stabilize domestic demand amidst the ongoing property downturn, which has seen real estate investment plunge by 16.2% year-to-date. Current consensus reflects a target range of 1.04 to 1.12 for the USD/CNY as traders gauge the implications of this divergence and potential policy pivots ahead.
What the desk is arguing
The desk argues that the continued divergence within China's economy will likely define the latter half of 2026, especially as policymakers grapple with the dual challenge of stabilizing domestic demand and the faltering property sector. This dynamic has resulted in a notable disparity where external demand remains robust in contrast with weakened domestic consumption. Per the full note source, stabilizing the property market is critical for boosting confidence and spending among consumers.
Recent data reinforces this stance, with a reported decline of 4.1% in fixed asset investment year-to-date and a 0.6% increase in infrastructure investment, indicating that policymakers are struggling to find the right balance. The contrasting performance of the 'new' vs. 'old' economy, with tech investments growing, suggests that the government may be compelled to revise its monetary strategies to pivot away from an over-reliance on export-driven growth and toward enhancing domestic demand.
Where it sits in our coverage
Our consensus target for USD/CNY stands at 1.075, with a range from 1.04 to 1.12 for March 2026. This includes specific targets from notable firms: - jpmorgan: 1.10 - bofa: 1.04
This view of ongoing divergence is slightly at the upper end of the consensus range, suggesting traders could prepare for further volatility as domestic demand trends unfold.
How other firms see it
Several firms are aligned with our view, forecasting that the economic divergence will support a stronger USD against the CNY in the upcoming months, notably jpmorgan and bofa. Contrarily, firms like citi are more pessimistic about Chinese domestic recovery, predicting a more subdued growth outlook, which may imply a weaker CNY against the USD.
Market participants should monitor the USD/CNY pair closely, especially with indicators reflecting the health of the Chinese economy and the PBoC's policy decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's economic divergence is widening, with clear K-shaped trends.
- 02The PBoC may need to revise its policies to support domestic demand amid declining property investment.
- 03Current targets reflect a consensus expecting a cautious recovery trajectory for the CNY.
- 04Investors should watch for implications of monetary policy changes on USD/CNY and overall market sentiment.
Market implications
Watch for volatility in the USD/CNY as the PBoC's policy announcement approaches; key levels to watch include 1.04 as a support zone and resistance near 1.12. Trends in fixed asset investments will also provide critical insights into economic health going forward.
Risks to this view
Any significant stabilization in the property market or unexpected fiscal stimulus could invalidate the current bearish view on the CNY, potentially shifting sentiment and trading patterns in favor of a stronger yuan.
Articles 3 key questions for China’s second half of 2026 Published 11:06 China Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download China’s economy has seen a growing divergence this year, with two distinct K-shaped trends moving in opposite directions. Here, we look at three questions for the second half of 2026: does the divergence persist, does the central bank rethink its policy framework, and do policymakers deploy additional support? Lynn Song The question is whether policymakers can stabilise domestic demand and find a bottom for the property market Will China’s economy continue to diverge in 2H?
The divergence of China’s economy continues to widen. This trend is exemplified by two overlapping K-shape dynamics that are only strengthening. The first is the gap between external and domestic demand.
This has been the case for the past few years, as China’s exports found solid global demand while domestic demand lagged. Explanations for this latter challenge include continued wealth destruction from the property downturn and wage growth slowing due to involution-type competition in a near-deflationary environment. The second is the variance between China’s ‘new’ and ‘old’ economies.
The tech-focused new economy continues to perform solidly this year. Hi-tech manufacturing has grown 13.1% year-on-year, year-to-date, while hi-tech fixed asset investment has grown 4.5% YoY YTD. Yet the old economy looks quite soft.
Overall, FAI is -4.1% YoY YTD, real estate investment is down -16.2%, and infrastructure investment is up just 0.6%. The trend is quite clear. The question is, could we see this divergence narrow in the second half of the year?
The answer likely depends on whether policymakers can stabilise domestic demand and find a bottom for the property market. Measures to this end should be underway. Is the PBoC set to revamp its monetary policy framework again?
The People’s Bank of China unveiled a new policy tool at the end of June, conducting RMB 900bn of overnight reverse repo operations over two days. Markets have been speculating that the PBoC might eventually shift its policy rate from the current 7-day reverse repo rate to the overnight rate. These operations appear to be setting the groundwork for this pivot.
The interest rate wasn’t published, and the PBoC didn’t announce further use of the overnight facility in early July. This suggests the 7-day rate remains the primary benchmark for now and that the shift will likely take some time. Since the overnight rate remains the most liquid and important rate, the PBoC will likely seek to improve monetary policy transmission by eventually targeting it.
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