China’s July macro data just landed, and the title of our monthly macro note says it all: “A Grim Picture.”
Consumption, investment, and property all deteriorated further last month – and the two props that supported the economy in the first half of the year are now fading fast.
On this episode, Trivium China podcast host Andrew Polk sits down with Joe Peissel (Lead Macro Analyst) to unpack:
How July’s slowdown was broad-based, across nearly every metric that matters – and why growth looks even worse than the headlines suggest
How the K-shaped economy has spread from output into investment flows, entrenching the divide between booming and struggling sectors
Why deflation, not inflation, remains the real danger for a heavily indebted economy like China’s – as officials are having to quietly pick their poison
Why even China’s 24% y/y export growth print obscures a much less impressive reality, once you separate price from volume
Transcript
Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder Andrew Polk, and today I’m joined again by Trivium’s Lead Macro Analyst, Joe Peissel. Joe, how are you doing, man?
Joe Peissel: Hey, Andrew. I’m good. Thanks, man. Happy to be here as always.
Andrew: Good to have you. Joe is here today to talk us through China’s July macroeconomic data. The title of his most recent note pretty much says it all. It’s titled A Grim Picture. So, we’ll get into that and talk about why consumption, investment, and property all deteriorated further, why the K-shaped economy is now showing up, not just in output, but investment flows as well, and why the deflationary pressures that eased earlier this year look set to make a comeback.
But, of course, before we get into it, we’ve got to start with the customary vibe check. Joe, how’s your vibe today, man?
Joe: Yeah, my vibe’s good. Well, the thing is, my vibes are closely correlated with the Chinese economy by nature of my job. So, I would summarize my vibes, Andrew, as…
Andrew: Grim?
Joe: Gloomy, yeah, but with pockets of strength. That’s how I’m vibing, man.
Andrew: Yeah, well, you’re going to have some critical distance, man. You can’t let the work become your life. You definitely do not want your life dictated by the whims of the Chinese economy, let me tell you that. I’ve been doing this for a long time, and that was something I learned long ago.
Joe: That’s one of the saddest vibe checks I’ve given, I think.
Andrew: Well, my vibe is pretty mellow. This is the last week of summer. My kids are not in camp. So, we got me working from home, my wife working from home, my kids hanging out. It’s always just a little bit all four of us on top of each other at home all day. It gets a little bit much for everybody. I think our kids are going a little bit stir crazy. They do not want to start school on Monday, but I think it will be good for them. And I certainly am looking forward to it.
Joe: Sounds pretty intense, man.
Andrew: Well, we will not let my mellow state and your gloomy state undercut the energy of this podcast. We will still have a good discussion. So, stick with us, listeners. But of course, before we get into the content, we also have to do the quick housekeeping. So, a quick reminder, we’re not just a podcast here.
Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China across a range of issues, including macroeconomic policy, which we’ll talk about today. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund.
Otherwise, if you’re interested in more Trivium content, go to our website, again, triviumchina.com, to peruse our different subscription options. We’ve got a bunch of different China policy intel options on the site that you can check out, both free and paid, and along several different lines: tech policy, general business policy, China watcher policy, markets, which Joe covers. So, check that out.
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So, with that out of the way, Let’s get into it. You ready, Joe?
Joe: Yeah, I’m ready, Andrew.
Andrew: All right. So, I already started or noted the title of your piece is literally “A Grim Picture.” The July numbers just landed. Talk us through how bad it is and what’s different about this month’s sort of data and the slowdown you’re seeing versus the headwinds that we’ve seen economically all year.
Joe: Sure. Yeah. So yeah, it’s pretty grim. We’ve seen this broad-based slowdown across pretty much every metric that we care about — a slowdown in consumption, continuation of this unprecedented collapse in investment across China’s domestic economy, an acceleration in the property decline. I think there’s actually two things from H1, from the first half of the year, or certainly Q2, the second quarter, that were propping up China’s economy, which is starting to fade, and which make July’s data look even worse than it was earlier this year.
So, one is services consumption. That’s what households spend on services has so far been really resilient, but the growth rate slowed a lot in July, dropped to a two-year low. So, sort of the one final strong point of consumption appears to be waning. And the second area is inflation. There’s been this cost-push inflation from the Iran war. That in and of itself isn’t a good thing.
But what it did do is inflated literally Q2 GDP growth. So, Q2 nominal GDP growth, which incorporates price effects. I mean, it grew at its fastest rate in three years. And while that was mainly just a consequence of cost-push inflation, which we don’t want, there are positive consequences from that high growth. For example, nominal GDP growth is really closely correlated to tax revenues, for example. And we’ve actually seen an increase in government tax revenues. So, there are signs that deflationary pressures are returning, the end of this cost-push inflation, that brings a whole other set of challenges for China’s economy. So, hence the title, it very much was a grim picture.
Andrew: Excellent. Well, thanks for walking us through that. I mean, excellent explanation, not excellent for the Chinese economy, but you get what I mean. Talk to me now about this idea about the K-shape of the trajectory sort of moving beyond output and towards investment flows themselves. First of all, maybe you can kind of remind folks what the K-shape and the output is, and then tell us what you mean by the K-shaped shifting to these investment flows.
Joe: Sure. So the macro note I wrote last month, so that was covering June, and H1 data was creatively named; I think it’s, can you see the K or the K-shaped economy? The idea here, which we really highlighted last month, was China’s economy is diverging. You can see that really clearly if you put it on a graph, all the main economic indicators. A bunch of them are, or a few of them are heading up, very strong growth rates, and a bunch of them are heading down. They’re actually declining, already sluggish growth rates. On a graph, it literally looks like a K, hence the name.
So, what’s been growing strongly so far this year has been exports and high-tech manufacturing. So, that’s the output of EVs, shipbuilding, AI-related products, or semiconductor chips, or AI hardware, things like this. And then the tail end, or the bottom end of the K, are the things that are declining — property, domestic investment, really sluggish consumption growth, things like this. Now, what I highlighted in this month’s note, which I think is quite interesting, is we’re not just seeing the K-shape in China’s broader macroeconomy.
If we drill down into specific data sets, it’s appearing there as well. So, imports is one such example. But in particular, in this month’s note, I talked about it in the investment data. So, if we look at China’s aggregate domestic investment, fixed asset investment that fell by double digits. I think it’s about 13% decline. That’s huge. That is unprecedented. It’s actually accelerating. It was a faster decline than the previous months.
Within that manufacturing investment, that’s a subcomponent of aggregate FAI, manufacturing investment, that fell about four and a half percent. And again, that decline is accelerating. But if we drill into the manufacturing investment, so we disaggregate it by different industries, what we see is there’s still strong growth, but concentrated in a very narrow subset of industries. And these are sectors where manufacturing output is also really high.
So, we can think about computers, AI-related components, AI hardware, really, various different areas of transport, equipment, specialized machinery. All of these areas from a manufacturing output perspective are grown by double digits. And so, manufacturing investment in these areas has also grown really strongly. But meanwhile, investment in the broader or in other areas or other manufacturing subsectors is pulling back really fast. So investment in things related to property. So you can think of things like in furniture, in cement production, glass manufacturing, metal output, both manufacturing output and manufacturing investment is pulling back.
Actually, there’s this K-shape within the investment data where we’re seeing investment growth in some subsectors growing really fast, but in the majority declining. So, there’s really tight correlation between manufacturing investment and manufacturing output disaggregated at the individual industry level. The problem with that is that it entrenches this K-shape. It exacerbates this discrepancy, because if you have some part of the sectors, you almost have this positive feedback loop.
So, they’re investing lots, they’re producing lots, they invest more. But the flip side is that also applies to the sectors which are declining. They invest less, they produce less, and, as a consequence, they also invest less. So it exacerbates the K-shape in China’s economy.
Andrew: And talk to me just a little bit on this about sort of the relative scale between the upper end of the K and the lower end of the K. My impression is that the pieces of the economy that are doing well, particularly the AI-linked high-tech type stuff, are growing very fast, but are a relatively small portion of manufacturing and of overall industrial manufacturing output.
And I would guess that it’s the same for investment, right? That these parts of the economy make up a smaller part of overall investment. And thus, you put it all together and you’ve still got a pretty weak investment environment, even though some areas are doing really well. Is that right?
Joe: Yeah, that’s exactly it. We spend a lot of time talking about China’s high-tech or high-value manufacturing, and it is an important part of the economy, but it’s still the minority of economic activity. China’s manufacturing base still involves a lot of lower-value or medium-value output that is not related to the things we talk a lot about, like AI or EVs or clean energy. And so, a consequence of that is, well, we see investment in AI manufacturing facilities grown by double digits, but overall, manufacturing investment still declined by 4.5% because it’s dominated by these other parts of the economy which aren’t performing as well.
Andrew: Yeah, and I say this pretty regularly, but my sense is that, I mean, based on everything that we write and everything that we read about both the Chinese economy and what Chinese officials are saying is that top policymakers kind of approach is to kind of wait it out and allow these smaller portions of the economy that are growing very fast to get bigger and bigger and bigger and bigger and bigger, and eventually carry the weight for economic growth or carry the load.
That’s just a process that’s going to play out. So, that’s one thing that I kind of always remind people of. I think that’s a key part of what they’re thinking. And then the second piece related to that is that one of the biggest chunks of the economy, even though it’s shrinking, is still the property sector. And so, if you’re trying to wean the economy off of property as a growth driver, that’s also going to take time. And it just means that you still have this massive chunk of the economy struggling, contracting.
And while you’ve got new growth drivers, they are, or budding growth drivers, we shall say, they remain still very small, especially compared to the property sector. And so, this is a process that the party seems pretty committed to that they’re going to let play out over time. And so, in a way, that explains, one, why they’re not panicking, but also it underscores that this is going to be a pretty extended transition process.
And also, I would say, it seems to me that this is a path that is at least partially intentional, so that officials have made themselves comfortable with the idea that overall growth is going to be sluggish throughout this transition process. And I, again, just would say, you know, for people looking at the Chinese economy, everyone keeps saying, oh, the Chinese economy is terrible, is terrible, is terrible.
Well, a big chunk of that is simply down to the real estate market, which they are purposefully shrinking and purposely trying to move away from. Do you agree with those kind of framing ideas?
Joe: Yeah, I agree with everything you said. Nothing to add. Beijing is like very aware that they have a painful transition ahead of them. And they’re willing to tolerate that pain to support this structural change in the economy.
Andrew: So don’t expect any big transitions in policy terms anytime soon, I don’t think, but we’ll get to that piece in a minute. Before we do that, I want to now pivot to sort of the price action and the economy. You mentioned in your piece that there is a risk, and I would say it’s probably more than a risk. It’s virtual certainty at this point that China’s deflationary pressures will return in the coming months. Can you talk more about what’s happening in that space?
Joe: Yeah, sure. I would just say, I mean, I’m not convinced it’s a certainty because so much of it is dependent on the outcome of conflict in the Middle East. So, I think it’s plausible. There’s a scenario where commodity prices, oil prices in particular, spike for a sustained period. And I think that could spill over into kind of broader inflation in China’s economy. I don’t know whether that’s likely, but I think it’s possible. But I agree. I think the more likely outcome is a return of deflationary pressures.
So, over the past few months, we’ve seen this rebound really in producer prices and, to a lesser extent, in consumer prices. And this has totally been a cost-per-shock. It’s not a domestic demand story at all. So, input prices for manufacturers, oil and other commodities, just various manufacturing inputs, these have increased mainly because of the Iran war. And so, as a consequence, we saw a reversal in like three plus years of PPI deflation. What manufacturers have been selling their goods for at the factory gate has been declining for over three years, and finally reversed a few months ago.
And there was a slight spillover impact on consumer prices as well, which picked up. But we’re seeing a slowdown in both CPI and PPI inflation. So, in July, consumer price inflation, it slowed sharply to half a percentage point, down from 1% the previous month. So, a really sharp slowdown. And if we look at it on a month-to-month basis, so generally when we talk about changes in inflation, we’re thinking about year-to-year. So, what were prices in July 2026 relative to July 2025?
But if we look at it on a month-to-month basis, so what were prices in July relative to June of the same year? Well, then CPI has actually been declining for three consecutive months. So, in many respects, consumer price inflation has already returned. We’re just not seeing it in the headline, the year-on-year growth figures yet, but it’s very likely that there’s going to be a return of deflationary pressures. Now, this really isn’t a demand story, aside from the fact that there is no demand. That’s why prices have fallen, but prices have been falling for a long time.
There was simply a short interval of cost-push inflation, predominantly caused by the Iran war. Now, that is fading away. We’re seeing this unmasking of deflationary pressures, which have been sitting there all along. It’s really no change from what we’ve been tracking over the past few years. Of course, the return of deflation is really problematic for China.
I mentioned earlier, nominal growth was boosted in Q2 because of these inflationary pressures. And again, I’ll say this again, we don’t like cost-push inflation. It’s not a good thing in and of itself, but it does lead to a boost in nominal economic activity, and that is associated with some benefits. Increase in tax revenue is the most obvious one. And so now we have a return of deflationary pressures, we’re going to have all the associated problems. That’s going to hammer corporate revenue. That’s going to hammer government tax receipts. That’s going to undermine consumer confidence. So, it’s just another headwind to an already struggling economy.
Andrew: Yeah. I want to throw a little bit of a curveball at you. So yeah, congratulations, or get ready for this one. I think you’ll be fine for it. But just as you’re talking through that, I was thinking, I mean, for any policymaker, you really want kind of inflation to be in a sweet spot, right? You want mild inflation that kind of is indicative of expanding domestic demand, but isn’t growing so quickly that it’s reducing people’s real wages, real wealth, that kind of thing.
Traditionally, over decades, Chinese policymakers have been very wary of inflation, specifically consumer price inflation, because in the ‘70s and ‘80s, huge inflationary pressures in a lot of emerging markets led to economic and social instability. And so, officials have really been very focused on kind of trying to keep that contained for a long time. Yet, at the same time, deflation is also not a good situation to be in. And it underscores other vulnerabilities with the economy, specifically the overcapacity, overproduction type issues.
So, neither high inflation nor deflation is particularly good. You’re kind of looking for that sweet spot. And so, the reason I bring this up is we talk about deflation as insidious and difficult to do, and I think that’s true. But then we also say, well, this inflationary impulse that they have is also not ideal because, like you said, it’s cost-push inflation through an external shock that is just rising or driving up commodities prices, which is reducing margins for industrial producers.
But my sense is that officials have sort of, if they had to choose, they might choose the cost-push inflation. And even if that’s not the case, I would say they’re sort of like taking advantage of the cost-push inflation to sort of make some adjustments. Dinny has written about how they’re kind of using that inflationary environment plus strong exports to start a little bit of deleveraging in order to sort of cap debt growth with the idea that several years down the road, five, 10 years down the road, they’re probably going to have to raise more debt to build up their social security framework.
But do I have that right? Do you think they’re sort of like, well, this isn’t the best option, but we will kind of take advantage of inflation while we have it? Or do you think both options are bad? Or what do you think, I don’t know, Chinese policymakers would almost prefer when it comes to the inflationary?
Joe: They have to pick their poison.
Andrew: Yeah, yeah.
Joe: Right. Yeah, yeah. I think there’s no doubt deflation is the more dangerous problem for China’s economy. I can think of two main reasons. And I think the first, probably the most important, is that China is a highly indebted economy. And as you just mentioned, China’s trying to use inflationary pressures to try and deleverage the economy, to try and reduce its debt-to-GDP ratio. Well, deflation achieves the opposite of that.
Deflation raises the real value of debt while incomes or tax revenues stagnate. So, for a highly indebted economy, which China is, deflation is a real problem and makes it very difficult to tackle rising debt stocks. And then I think the second problem, there’s many, I’m just picking the main two, is that there’s this idea, there’s this risk of self-reinforcing expectations. So, consumers delay purchases, waiting for lower prices, which in turn harms the economy even further.
And we see this most clearly in the property data. Property prices have fallen. We’ve long argued that a prerequisite for an increase in property activity, so things like home building or real estate investment, or even sales, are for property prices to bottom out. And so, these two risks, the increase of the real value of your debt and this self-reinforcement expectations are two huge problems, real dangers for the Chinese economy.
I think inflation, in contrast, also has its problems, which you alluded to. But it’s a problem that China and also just conventional economic theory knows how to fight. So, we can think about tightening policy or reducing fiscal expenditure. It’s arguably easier to deal with excessive inflation than it is excessive deflation.
Andrew: Great points. I will say this all kind of gets back to the point that we’ve made and a lot of economists have made, which is, ideally, you’d have an inflationary environment driven by strong demand, and that’s the argument for China having or enacting a little bit more direct demand-side stimulus, which officials seem pretty reluctant to do. So, they’re kind of picking from bad options, but partly because they’re putting themselves in that place by refusing to do sort of more traditional macroeconomic management from fiscal expansion. Do you agree with that?
Joe: Yeah.
Andrew: Okay, let’s turn to exports — the part of the economy that is particularly bright has been all year, has been for several years now, continues to sort of outstrip expectations or outpace expectations. So last month, exports continued to go strongly at roughly 24% year on year. It sounds like a big win. How upbeat are you on the export side?
Joe: Yeah, it’s one of the successes of China’s economy right now. It’s the upward part of this K. 24% growth in July is amazing. It’s a really strong headline. But I think there’s some nuance we can add to that, which is if we look at exports in volume terms, they’re still growing but by a lot less than the export value. There’s 24% growth in value. So that growth in value, a lot of that is a price story. What I mean is that the prices Chinese exporters are charging is going up, that’s inflating overall export value.
But if we think about exports in real terms, like real activity, really stripping out the price effect, and we can do that by looking at volumes, how are exports growing in volume terms? It’s a lot less. So I can give some examples which really demonstrate this point. In value terms, semiconductor exports more than doubled. There’s growth of 117% year on year in July. In volume terms, they rose by 2%. It’s entirely a price story. And that’s because of the surging cost of memory chips, which is a consequence of the global AI investment boom.
So, just demand for memory chips has gone through the roof everywhere. And that’s led to inflationary pressure on the cost of memory chips, not just in China. Mobile phones, which are kind of a classic Chinese export, in value terms, they grew by double digits. In volume terms, they actually fell. China exported less mobile phone units in July 2026 than last year. But in value terms, they grew because the price is going up.
Same with a bunch of commodities. If we look at metals or petroleum-related products, in value terms, they grew. In volume terms, they shrunk. So, the surge in value, as I mentioned, partly driven by this global AI memory chip shortage, which has led to inflated prices for memory chips, and secondly, elevated commodity prices. So, export growth mainly driven by price, not really driven by China shipping more physical goods. Of course, there are exceptions to this.
Auto exports are surging in value and volume terms. They were up. China shipped 60% more cars in July 2026 than in July 2025. And again, the export of ships, of manufactured ships, that was up about 30% in volume terms. So, there are still some success stories. But I think the big takeaway here is we shouldn’t just look at the headline figure. It’s important to think about the nuance behind that. In this case, exports are an important part of the economy, but maybe not as much as the 24% year-on-year growth, the headline figure that we’re seeing.
Andrew: Yeah, I was thinking about that both as I was reading your piece and as you were talking here. And we kind of present or you kind of present the fact that export growth, at least last month, was driven by price effects as sort of not a negative, but kind of undercutting some of the positivity of the large export growth figure. But I guess the other side of that is, one, Chinese exporters have been dealing with negative margin pressure for a long time, right? Partly as they shift exports away from the U.S. and try to find new markets, partly due to a relatively sluggish global economy.
So, one, is this some relief for exporters with prices going up or at least a certain subset of exporters? And then secondly, I’d just say, as somebody who runs a business, I mean, if my total revenue goes way up, even if I’m not shipping more volumes, just simply on margin, then I’m perfectly happy with that. So, from a macro standpoint, it might not be ideal, but from an individual business standpoint, that seems totally fine.
Joe: Exactly.
Andrew: What do you think?
Joe: Yeah, you’re totally touching on it. So, from an individual business perspective, it’s great news. From a macro perspective is what we really care about when we think about trans macro economy, right? Higher export prices per se aren’t a bad thing. There’s still benefits —increased corporate revenues. And, as a consequence, higher corporate tax receipts for the government, things like this. But what I’m saying is we think of 24 year-on-year export growth really strong figure. What we care more about, if we had to pick, a minute ago you asked me to pick between too much inflation or too much deflation, now I’m asking myself – do I care more about export prices or export?
Volume, definitely volume, because that leads to more manufacturing activity, factory activity, has positive spillover effects on the labor market. It can lead to upward pressure on wages, things like this. So, ultimately, export volumes are really important here. And the export volume story is nowhere near as positive as the prices. But again, to clarify, I’m not saying export prices in and of themselves, it’s not a bad thing if exporters raise their prices. But if there’s no subsequent increase in volume, then I’m less excited about the headline export growth than otherwise.
Andrew: Yeah, I think the key is, one is kind of more beneficial for the macro economy as a whole. Another may be beneficial for individual businesses, as we talked about. And then the other piece is this isn’t China exporting inflation. This is China raising prices because of general sort of weak supply for key goods, particularly in the semiconductor and other AI-driven space, and very, very high demand. So, this is just kind of exporters reacting to the environment. So, they’re sort of more of a passive player in this.
Joe: Yeah, totally. We see the same with China’s imports in value terms. They’re way higher than in volume terms. So, China’s as much, yeah, it’s just a passive player here. Its exports have benefited from high global prices, but its import bill has surged as well. Actually, imports have been growing faster than exports most of this year. China’s trade surplus is actually down a couple of percent so far this year.
Andrew: Yeah, that’s interesting.
Joe: Yeah.
Andrew: Yeah. I think I’ve read headlines or not headlines, but in news articles, people make an argument, “Well, that should make policymakers in other parts of the world more comfortable,” but really not because it’s primarily down to surging cost of commodities. And part of the problem is that China doesn’t buy non-commodity goods from the rest of the world. Right? And that’s what people…
Joe: Exactly. Yeah. We actually, we did some research. We wrote a piece on this for our subscribers. If you strip out the impact of gold imports and memory chips, then China’s imports this year are up by single digits. If you include gold and memory chips, they’re up like 30% year on year. It’s not a broad-based increase in imports. It’s just a spike in the import bill because memory chip inflation and a kind of a one-off surge in gold purchases.
Andrew: Yeah. I’m glad you mentioned that because I thought that was a really interesting finding. So, I’m glad you highlighted it. Okay, let’s move now to another kind of downbeat piece, which has been continually downbeat for basically since the pandemic, and it’s China’s consumption picture. How bad is it and what’s going on there?
Joe: Oh, it’s pretty bad, Andrew. You teed me up for that one, man. So, sales of consumer goods, consumer durables, right? This is like autos and furniture and garments and cosmetics, all that sort of stuff. Sales of consumer durables rose by 0.6% in July. Tiny, tiny growth rate. Down from June, which grew by 1%. So, miserable growth in June, even more miserable growth in July. And we saw a decline in pretty much all of these big ticket items, which is what really from a macro perspective, we care more about the sale of, say, cars than we do of t-shirts because production of cars has much more spillover benefits.
It requires more skilled labor, higher wages, more complex supply chains. So, if we look at big-ticket items, then it’s even worse news. So, sale of cars, home appliances, furniture, all declined by double digits. The one exception was the sale of mobile phones and other consumer electronics, which grew quite strongly. And that’s interesting. It’s a very good kind of case study of the impact of fiscal stimulus. So, all of these items I just talked about- cars, furniture, mobile phones, consumer electronics, home appliances- they’re all part of the consumer goods trading program, right?
There’s essentially, the government providing subsidies for these goods. Now, the program was rolled out in 2024, and it initially targeted only at autos, home appliances, and furniture. So, they’ve now had like two and a half years of this subsidy stimulus. And the stimulus impulse has totally worn away. The reason being it boosts sales by pulling demand from the future. So, an individual that was going to buy a new piece. Let’s say they’re going to buy a new washing machine next year, but now there’s government subsidies available that will they buy it this year instead?
So, you get the short-term boost, but it means over the medium term, over several years, the stimulus impact fades. And this is what we’ve seen. This is why, even though in 2026, there are still subsidies available, the sale of these items is declining by double digits. But the program was only expanded to include mobile phones and other consumer electronics last year in 2025. So, they’ve only benefited from the program for about 12, 12 plus months, meaning that the stimulus impulse is still very much alive.
This is why last month, mobile phone sales, they grew by over 20%. So, what we’re seeing is that by borrowing future demand, over time, the stimulus fades. That’s already played out for cars, home appliances, furniture. And at some point, it’s going to happen to mobile phones as well and consumer electronics. Towards year end, the sale of these items is also going to decline. So, even kind of this one bright spot in the consumption data, this 20% growth in mobile phone sales, that’s running on a clock. It’s not a sustainable driver. At some point, it runs out.
And then to add to this gloomy picture, which I mentioned earlier, is the sale of services. This is household spending on travel and medical services, entertainment, going to the cinema, catering sales, all this sort of stuff. That’s fallen to its lowest growth rate in over two years. So, it grew by about 3.5%, 3.7%, I think. Previously, it’s been growing around the 5% mark. So, a sharp slowdown in one of the only strong parts of the consumption picture.
Andrew: So not ideal. Yeah, yeah, yeah.
Joe: Sorry, I left you on a cliff.
Andrew: No, that’s okay. That’s okay.
Joe: That’s my piece.
Andrew: Yeah. Well, anything that you see on the horizon that is going to turn the consumption picture around? I mean, we’ve been waiting for it. It seems like policy is not there. Are we just in for sluggish consumption? It seems like Beijing is… they talk about it a lot, but when push comes to shove, they seem unwilling to put more fiscal resources here. And maybe it’s unwilling, maybe it’s unable to manage this demand side picture on the consumption side. I mean, is there anything that can change this?
Joe: No, as you say, it’s largely focused on supply-side measures, even today. So, this August the 19th when we’re recording this, and Beijing has just released a policy plan to support local governments to support consumption in their local economies. This is like at the township level really localized policies. And it’s all about supply-side measures kind of building new shopping centers or converting dilapidated government buildings into retail stores, all this sort of stuff, improving consumption infrastructure is generally what they refer to it as very much a supply-side focus.
The one demand-side tool, which is this trading program, these consumer subsidies, that was effective for the original set of goods last year. It’s been effective for the mobile phone and consumer electronics this year. I mean, that’s just pulling forward demand. It’s not leaving a structural change in consumption. And it does raise the question, for which I don’t have a good answer, is what fills the gap when the program’s runway ends? At the moment, it looks like probably nothing. So, it’s another potential headwind for consumption in the coming months.
Andrew: Well, with that further grim sort of assessment, why don’t you wrap us up here? If you sort of had a single takeaway from the month’s data, what would it be? And then also sort of look ahead. What are you expecting from both the trajectory of the economy and policy, macro policy going forward?
Joe: So, look, a single takeaway, I think, is there’s been an exacerbation of this K-shaped economy. It’s kind of a tale of two economies. This narrow part of the economy, which is performing well, which is AI and export-driven and performing exceptionally well. And then there’s the much larger domestic economy, consumption and property and investment and mainstream manufacturing outside of AI and export-related sectors that is deteriorating. And this is exacerbated this month because we’re seeing a slowdown in consumption of services, and we’re seeing a removal or kind of a waning of this cost-push inflation, so the return of deflationary pressures.
What that means for H2, clearly pressure is building on policymakers to do something. I think the most recent signal we saw was in late July when they explicitly acknowledged economic challenges, but didn’t really commit to any new policies. I think they used the phrase “incremental policy measures,: so they promised to implement incremental policies, whatever these are, presumably modest and not very effective. But at least there’s explicit acknowledgement of the challenges that face them.
Now, I think the one clear area where we may see some progress or some momentum would be in infrastructure investment. It’s really unprecedented that infrastructure is declining for so long and so fast. And we’ve seen some movements. So, this week, the macro planner has pushed policy banks to increase their funding for infrastructure development. And there’s chatter going on in policy circles that Beijing sees this as a kind of as an increase in the important lever, something they really do have control over in the domestic economy to boost growth.
So, what that entails, it could be an increase in local government debt instruments, could be an expansion of the central government balance sheet to fund more infrastructure. I mean, we’re going to find out in the next few months. As of now, we’ve seen a push towards policy banks issuing more. At some point, we expect an increase in government debt as well to support infrastructure spending.
Andrew: Well, I was just again thinking as you were talking, it used to be when I started in this business 20 years ago, that if you said something like Chinese policymakers understand the issue and it’s on their radar, that you could expect a policy fix, a policy, fairly aggressive policy response to whatever that issue was in short order. And I feel increasingly the idea that Chinese policymakers know the problems. It’s like we have the same problem we have in the West. They’re admiring the problems. They’re not doing much about it, right?
Joe: Mm-hmm, yeah.
Andrew: So, we do not expect that necessarily to change anytime in the short term, which means kind of what you see is what you get. And the economy is likely to kind of struggle and bounce along on its current trajectory for the foreseeable. But as it does, we will continue to analyze it through Joe’s great work. So, Joe, I appreciate you walking us through all this today.
Joe: Yeah. Thanks for having me, Andrew.
Andrew: Yeah. Thanks, everybody, for listening. We’ll see you next time. Bye, everybody.
