China’s weak domestic demand continues to undermine growth
The desk perceives China's ongoing weakness in domestic demand as a crucial factor impacting its economic growth outlook. As noted in the source, the persistence of low consumption and investment levels has raised concerns about meeting GDP growth targets, with Q3 likely remaining suboptimal unless boosted by a strong September. This view aligns with the broader sentiment reflected in the marketplace, where consensus expectations remain cautious given ING's forecast of 4.5% GDP growth year-on-year tilted to the downside. Additionally, continued external demand is essential but insufficient alone to counterbalance internal economic fragility, suggesting that a watchful eye on Chinese economic indicators will be pivotal in the coming weeks, notably ahead of the next data releases .
What the desk is arguing
The desk argues that weak domestic demand in China is significantly undermining growth prospects, with August data showing retail sales growth decelerating to just 0.4% year-on-year. Per the full note , this depletion in consumption is most apparent in critical sectors, such as the automotive industry, where sales plummeted by 18.5% YoY.
Continuing this trend, investment momentum is anticipated to remain sluggish as well, suggesting that without compelling policy support, China's GDP growth may stagnate near the lower end of expectations. Notably, while industrial activities are buoyed by external demand, the disparity in growth across sectors signals deeper issues within the domestic economy.
Where it sits in our coverage
Our internal consensus target for USD/CNH is 1.075, with a range between 1.04 and 1.12. Notable firm forecasts include: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
The desk's view aligns with jpmorgan but diverges from bofa, positioning itself close to the upper range of expectations, indicating a more optimistic outlook against the cautious stance held by some firms.
How other firms see it
Aligned firms such as jpmorgan reflect a consensus that leans towards stable growth but recognizes the pressures of domestic demand constraints. In contrast, bofa presents a more bearish outlook, rooted in expectations of continued consumption weakness.
An important indicator to monitor is the trajectory of USD/CNH as it reflects broader confidence in China's recovery and could indicate sentiment flows influenced by the PBOC's policy stance amidst sluggish domestic conditions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's domestic demand is weak, affecting GDP growth targets.
- 02Retail sales growth slowed to 0.4% YoY in August, highlighting consumer weakness.
- 03Investment momentum remains sluggish, leaving economic recovery in jeopardy.
- 04External demand supports industrial activity but does not alleviate broader domestic fragility.
Market implications
Watch USD/CNH closely as it serves as a barometer of sentiment towards China's economy. A sustained break above 1.075 could signal market apprehension regarding the growth outlook, while a failure to improve retail sales in September could reinforce bearish sentiment.
Risks to this view
The main risk to this outlook is a sudden shift in policy support from the PBOC or an unexpected recovery in retail sales, which could improve consumer confidence and future economic projections. Should these indicators show signs of strength, it may compel a reassessment of the bearish stance on the Renminbi.
Articles China’s weak domestic demand continues to undermine growth Published 04:41 China Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Weak Chinese consumption and investment persisted amid soft domestic demand, while solid external demand continues to support industrial activity. Overall, China's third-quarter GDP looks likely to stay near or below the low-end of the target range Lynn Song Weak August suggests 3Q growth will remain soft Today's data suggest that China's economy continued to face downward growth pressures in August. Barring an unexpectedly strong September, GDP growth will likely remain sluggish in the third quarter, and risks to our 4.5% year-on-year forecast - and our 4.6% call for 2026 - both look tilted to the downside.
Policy support has been rather limited to date. As a result, we continue to see growth and investment momentum remain sluggish. The bright spot remains industrial activity, where resilient external demand and China's own tech and industrial upgrading continue to drive growth.
Divergence continues to widen within China's economy. Hi-tech and external demand-focused sectors continue to perform well, but most other categories are underperforming. China's economic indicators have been quite uneven this year Retail sales deceleration highlights weak consumption Retail sales slowed to 0.4% YoY in August, down from 0.6%, weaker than expectations (market: 0.8%, ING: 0.7%).
This was the second straight month of deceleration, bringing year-to-date retail sales growth down to just 1.1% YoY. Looking at the breakdown, we continued to see a significant drag from a few key categories. Auto sales were the biggest drag on retail sales, down 18.5% YoY.
Despite strong exports, China has been both the largest producer and the largest consumer of electric vehicles, and the drop in domestic demand has weighed on the auto sector this year. Furniture sales also remained well in contraction territory (-7.9%), but household appliance sales bounced back to 2.3% YoY, the first positive growth since September 2025. Gold and jewellery sales fell sharply by -17.5% YoY, a 4-month low, despite a recovery in gold prices in August.
Two categories bucked the trend with strong growth. Communication devices grew 27.3% YoY, while tobacco and alcohol rose 12.5%. Consumer staples categories such as grains and oils (4.0%) and beverages (4.9%) continued to outperform.
Recent measures to support consumption include interest rate subsidies for consumer loans. These are expected to have a modest, at-best, impact on headline consumption growth. Moving forward, as the drag from the trade-in policy weakens, we may see some stabilisation in retail sales, but a more significant turnaround will likely require additional support.
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