5.3% Expected vs. Reality

The 5.3% growth rate of China's economy in the first half of the year is hard-won and significant. By comparing with the same period last year, we believe that the following unusual points are particularly important for the outlook of the economy and policies in the second half of the year:

First, the proportion of China's GDP to that of the United States has rebounded in the first half of the year. This resilience is beneficial for gaining initiative in the current international economic and trade struggles, especially against the backdrop of the U.S. tariff escalation on other economies. In the complex external environment of the second half of the year, China is still expected to maintain a "phase-wise easing" towards the U.S.

Second, the economic "buffer" has reduced the urgency for short-term policy intensification. Given that the 5.3% growth rate is significantly better than the same period last year (5.0%), this means that even if economic growth slows in the second half of the year, achieving the annual target of around 5% is not difficult (we estimate that a 4.7% economic growth rate in the second half of the year would successfully achieve the 2025 growth target), therefore, the necessity for a policy shift mid-year is not high.

Third, attention should still be paid to the "differentiation in economic performance." In the first half of this year, with the support of the "two new" initiatives, the differentiation of "strong production and weak consumption" seen in the first half of last year was not obvious. However, we believe that there is a risk of this differentiation reappearing in the second half of this year, especially with the current decline in real estate prices and the weakening of "two new" policy efforts in the second half.

Also noteworthy is the 4.3% nominal GDP growth rate in the first half of the year, which fell from 4.6% in the first quarter to 3.9% in the second quarter. The widening gap between nominal GDP and real GDP confirms the central bank's judgment of "prices running at a low level for a sustained period." Therefore, we expect that after the Financial and Economic Committee meeting, "anti-involution" will still be an important topic at the Politburo meeting in July. However, unlike the previous round of "capacity reduction + demand-side stimulus," this round of "anti-involution" will be more promoted from the supply side and key industries.

Consumption: There is still momentum, but it faces base pressure in the second half of the year. In terms of retail goods, as the impact of this year's "618" event fades, June saw a year-on-year decline. Structurally, the "trade-in" policy continues to play a significant role, with retail growth in categories such as home appliances and automobiles showing substantial increases; however, the impact of oil prices has been a major drag on petroleum and related products. Looking ahead, with the orderly distribution of remaining "national subsidies," consumption still has some momentum. However, as the base increases in the second half of the year, year-on-year retail sales may experience downward fluctuations in certain months

It is worth noting that restaurant revenue in June saw a significant year-on-year decline. There are three main reasons behind this: first, the strong consumption performance during last summer (restaurant revenue in June last year increased by 5.4% year-on-year) led to a higher base for June this year. Second, the statistical caliber had a certain impact, with restaurant revenue calculated based on retail sales being 1.3 percentage points lower than the official year-on-year figure, indicating that the expansion of the statistical caliber this year has also raised last year's base. Third, competition from platform companies like JD.com and Meituan, as well as the issuance of subsidies, may have also had some impact.

Industry: Exports exceeded expectations, leading to industrial production exceeding expectations. Influenced by factors such as the postponement of tariffs in May boosting exports to June, the export growth rate in June unexpectedly increased, which also drove the year-on-year growth rate of industrial added value to rise instead of fall, achieving a good result of 6.8%. In addition, the increase in working days in June also contributed to the year-on-year growth rate of industrial production to some extent.

However, with external uncertainties still present and internal "anti-involution," industrial production is likely to slow down in the future. Externally, after the U.S. imposed additional tariffs in April, companies generally adopted a cautious strategy; internally, the current capacity utilization rates in industries such as coal mining, chemical fibers, and automobiles have significantly declined, leading to a further drop in capacity utilization to 74.0% in the second quarter, indicating that capacity needs further clearing. Both internal and external pressures are likely to suppress future industrial production.

Manufacturing: A direct signal of weakened private investment momentum. Since the U.S. imposed additional tariffs in April, the growth rate of manufacturing investment has been in a downward channel, with the year-on-year growth rate in June further declining to 5.1%. Considering the trend of declining activity in private manufacturing investment, the core factors affecting the growth rate of manufacturing investment currently lie in insufficient recovery of expectations and confidence.

From the perspective of different industries, the industries that saw a significant slowdown in manufacturing investment growth in June were mainly electronic equipment, specialized equipment, chemical products, and pharmaceuticals

Infrastructure: Its importance remains in the second half of the year. In June, the growth rate of broad infrastructure investment fell to 5.3% (from 9.2% in May), mainly due to the drag from the utilities and water conservancy, environment, and public facilities sectors. In contrast, the transportation and storage sector showed better investment growth. Overall, broad infrastructure investment in the first half of this year has shown resilience, partially offsetting the decline in manufacturing investment.

The importance of "stabilizing infrastructure" remains high this year. The amount of fixed asset investment projects approved by the National Development and Reform Commission (NDRC), which typically leads infrastructure investment by 6-9 months, has been at a historical high in the first half of this year; at the same time, the asphalt operating rate has also been on an upward trend recently, performing significantly better than the same period in 2024. These indicators suggest that the willingness to construct infrastructure projects this year is not weak, and future infrastructure growth will remain in a neutral range.

Real Estate: Pressure is more pronounced than in the second half of last year. Compared to last year, the real estate market this year has shown a clear characteristic of "stock outweighing increment," which is consistent with the policy of "accelerating the construction of a new model for real estate development." On one hand, the growth rate of real estate investment has further declined compared to last year, and the clearing and adjustment of capacity are still ongoing. On the other hand, both the sales of commercial housing and the growth rates of new starts and completed areas have significantly improved compared to last year. However, with the retreat of earlier policy impulses, the recent operational trend of real estate has shown volatility, with a decline in commercial housing transactions in 30 cities since July. Looking ahead, as urban renewal and the construction of "good houses" continue to advance, there is further room for policy on the demand side to open up.

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