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.
Several categories are causing a big drag on overall consumption Hi-tech only silver lining in otherwise dismal picture China's fixed asset investment growth fell -7.2% YoY ytd through the first eight months of the year, largely in line with expectations (market: -7.1%, ING: -7.4%), and decelerated for a sixth consecutive month. In terms of the key categories for FAI, hi-tech FAI is the only highlight in the data, up 5.2% YoY ytd from 5.0% YoY ytd in the first seven months of the year. Resources continue to funnel into the AI race, industrial upgrading, and general tech self-reliance themes.
Unfortunately, the good news pretty much ends there. Other categories generally saw slumps worsen in August. Infrastructure (-4.0%), manufacturing (-2.3%), and real estate (-19.9%) investment all fell.
Public sector investment (-3.6%) continued to outperform private sector investment (-10.1%). However, efforts to accelerate fiscal expenditures in 2H26 have yet to translate into a turnaround in public sector investment. We will see if these efforts can help FAI bottom out in the coming months.
For now, FAI looks like a clear drag on growth, and the data is a microcosm of China's K-shaped divergence, with resources pouring into tech while other areas languish. Negative FAI growth hasn't translated into negative gross fixed capital formation in the GDP data, and the relationship between the monthly data and the GDP data has weakened this year. FAI looks bleak outside of hi-tech sectors IP beats forecasts amid solid external demand Industrial production rose 5.2% YoY in August, accelerating from 4.5% in July, outperforming expectations for a smaller rebound (market: 4.8%, ING: 4.9%).
Year-to-date growth remained at 5.3% YoY, with industrial production the clear standout amid weakness in consumption and investment. Manufacturing continued to outperform the headline, growing 6.1% YoY, while equipment manufacturing and high-tech manufacturing rose 12.1% and 16.7%, respectively. In contrast, mining output fell to -1.4%, highlighting that the improvement was concentrated in manufacturing rather than broad-based across the industrial sector.
At the industry level, strength remained concentrated in higher-end manufacturing. In value-added terms, computer, communication and other electronic equipment manufacturing rose 17.2% YoY, followed by rail, ships, aerospace and other transport equipment at 13.4%, special equipment at 11.4%, and electrical machinery at 9.9%. Export delivery value also rose 11.1% YoY in nominal terms, consistent with strong merchandise export growth.
This indicates that external demand remained an important support for production. Product-level data showed a similar pattern. Lithium-ion battery production rose 57.2% YoY, industrial robots increased 34.6%, new energy vehicles rose 21.9%, and semiconductor integrated circuits increased 20.6%.
However, solar cells, smartphones and microcomputer equipment recorded double-digit declines, highlighting continued divergence within the advanced manufacturing sector. Traditional property and construction-linked industries remained weak. Cement (-11.7%), flat glass (-7.6%), and steel products (-5.5%) all contracted year on year.
Overall, industrial production regained momentum in August, but growth remains heavily reliant on high-tech manufacturing and exports. Industrial production continues to clearly outperform Property prices continue the slow grind downward China's National Bureau of Statistics released its 70-city sample of property prices for August. New home prices fell by -0.17% month-on-month, while used home prices dipped by -0.31%.
This was similar to the pace of declines seen in July. The city-level breakdown showed that 21 of 70 cities saw new home prices stabilise or pick up in August, down a little from July's 23. Just 8 of 70 cities saw secondary market prices stabilise or pick up in August, unchanged from July.
The silver lining was another solid month for property prices in China's tier 1 cities, with prices improving in Shanghai, Shenzhen, and Guangzhou, though prices in Beijing edged down. A bottoming-out in property prices would likely start in the core, where demand is most genuine. The entire property sector remains a major drag on the economy, with investment down 19.9% YoY ytd.
It’s arguably one of the biggest overhangs on confidence, with the negative wealth effects holding back consumption and investment appetite. It has forced local governments to rethink financing models, as land sale revenue has dried up. A recent Beijing land sale was cancelled after only one developer bid at a land auction.
There's still a long road ahead before this drag fades. Property prices need to stabilise, and inventories need to normalise before we might see a recovery of investment demand. Most cities continue to see prices falling Retail sales Property prices Industrial Production Fixed asset investments Emerging markets China Asia Pacific Asia Markets Asia Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Lynn Song Chief Economist, Greater China Lynn Song joined ING in January 2024 as the Chief Economist for Greater China. Prior to joining ING, he worked at China Construction Bank International, China Merchants Securities (HK), and Haitong… In this article Weak August suggests 3Q growth will remain soft Retail sales deceleration highlights weak consumption Hi-tech only silver lining in otherwise dismal picture IP beats forecasts amid solid external demand Property prices continue the slow grind downward
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