Beijing Watch: China's Q2 GDP Slows to 4.3%! AI and Semiconductors Surge, but Domestic Demand Stuck in 'Zero Growth' Stalemate

China's second-quarter GDP growth slowed to 4.3%, retail sales in July rose only 0.6%, and fixed asset investment fell by 6.7%. On the other hand, exports in AI, semiconductors, and high-tech products continue to support the Chinese economy. This 'strong external, weak internal' structure creates a dilemma: exports cannot stop, yet domestic demand fails to catch up. What, then, will sustain China's economy moving forward?

On August 17, Chinese Premier Li Qiang chaired a State Council executive meeting. The meeting sent a clear signal for China's second-half economic policy: actively stabilizing external demand and expanding international economic and trade cooperation, while once again placing 'expanding domestic demand' at the center of policy priorities.

Premier Li candidly acknowledged during the meeting that while China's economy shows 'new momentum and an optimized structure,' the problem of 'insufficient domestic demand remains prominent, difficulties for some industries and enterprises are increasing, and external uncertainties are rising.'

July 2024 data shows a simultaneous slowdown across multiple indicators, including industrial production, consumption, and investment. Fixed asset investment from January to July declined year-on-year, with negative growth even when excluding real estate.

This meeting continues the guidance from the Chinese Communist Party's Politburo to 'fully leverage the effectiveness of existing policies and promptly plan and implement practical, effective incremental policies.'

Currently, China's economy is exhibiting a 'two-speed' pattern. On one side, AI-related products, high-tech manufacturing, exports, and certain strategic emerging industries remain relatively strong. On the other, household consumption and traditional domestic demand continue to lag.

Hema Fresh, a membership-based store in Shijiazhuang, Hebei Province, has become a consumption hub for the local middle class. (Photo by Tian Chang)

'Domestic demand insufficiency remains prominent'—first, exhaust existing policies

A well-known Chinese financial blogger, 'Macro Marginal,' pointed out: 'During last year's trade war, 'unconventional' and 'reserve policies' were frequently mentioned but ultimately failed to materialize, mainly because the economy performed better than expected. Now, existing policies (fiscal spending, project launches, new policy financial tools, etc.) have not yet been 'fully utilized.' We're trying to serve from the pot before finishing what's already on our plate.'

Over the past few years, Beijing has aimed to reduce reliance on external markets through 'internal circulation.' However, actual economic operations have revealed a different phenomenon: amid a real estate downturn, declining household confidence, and weak private investment, exports have become a crucial outlet for manufacturing capacity absorption.

Especially in artificial intelligence, new energy, electronic components, and advanced manufacturing, global demand continues to provide some support for Chinese manufacturing. In recent years, China has maintained part of its economic momentum through goods exports, particularly high-tech products. However, this also exposes the Chinese economy more to global trade tensions and fluctuations in external demand.

Compared to short-term, pragmatic growth stabilization measures, the tone of medium- to long-term industrial policy remains firm: 'accelerate the transition from old to new growth drivers, increase support for emerging pillar industries and future industries, and continuously promote traditional industry transformation and upgrading.' This aligns perfectly with the '15th Five-Year Plan's' theme of 'large-scale tech development and industrial leapfrogging,' indicating that Beijing has not relaxed its commitment to structural transformation despite short-term economic pressure.

According to reporters' observations, this meeting devoted the most time to investment, almost serving as a 'mobilization meeting for investment stability.' From 'urgently advancing the implementation of the 15th Five-Year Plan from the outset' and 'accelerating the implementation of the 'Six Networks' construction plan,' to 'innovating investment and financing mechanisms to attract social capital' and 'effectively promoting private investment,' the sense of urgency was palpable. The 'Six Networks' refer to the water network, new power grid, computing power network, next-generation communications network, urban underground pipeline network, and logistics network—key infrastructure directions for the opening year of the 15th Five-Year Plan.

The meeting also required 'coordinating investment in people and consumption promotion, increasing policy resource allocation,' directly linking consumption policy within the investment section rather than treating it as a standalone chapter. This aligns with the earlier tone of the NDRC's mid-year meeting, clearly indicating a downgraded priority for consumption policy.

Moreover, local officials' enthusiasm has become a concern. This year marks both a local leadership reshuffle year for the CCP and the first year of large-scale implementation of the 'correct performance view.' Local debt has become a political red line, significantly suppressing the traditional impulse to 'rush ahead aggressively.' The meeting specifically mentioned 'stimulating the enthusiasm of all parties to undertake entrepreneurial initiatives,' revealing Beijing's anxiety about mobilizing the execution level.

On June 24, 2026, Chinese Premier Li Qiang delivered a speech at the opening ceremony of the Summer Davos Forum in Dalian. (AP)

China's Q2 GDP at 4.3%—'Large-Scale Tech Development' Remains the Core Theme

China's Q2 GDP growth rate dropped to 4.3%, below the annual policy target range of 4.5% to 5%; industrial production and retail sales growth in July further slowed. This means the biggest challenge for China's economy in the second half is no longer 'whether growth can be maintained,' but 'what forces will pull growth back up.'

In the past, China's most familiar answers were threefold: real estate, infrastructure, and exports. But these three engines now face varying degrees of constraints.

The impact of real estate on China's economy has never been just about developers selling homes. It involves household assets, local government finances, bank credit, construction, home appliances, furniture, and numerous upstream and downstream industries. When the real estate market remains depressed long-term, households' expectations of their wealth are affected, and local governments' land revenue comes under pressure, ultimately transmitting to consumption and investment through various channels.

For China to 'expand domestic demand' now, the real challenge is not how many consumption vouchers to issue, but how to rebuild the confidence that makes households willing to consume and enterprises willing to invest.

On the export front, when the domestic market cannot absorb new production capacity, companies naturally seek overseas markets. But as more Chinese goods enter overseas markets, they may trigger trade protection measures from other countries. This creates a vicious cycle: insufficient domestic demand drives export dependence, increased exports raise external friction risks, and worsening external conditions force Beijing to rely even more on stimulating domestic demand.

China has continued rolling out fiscal, financial, and industrial policies this year, including equipment upgrades, major investments, and support for emerging industries. Official data also shows that 800 billion yuan in 'two major' investment projects for 2026 and 200 billion yuan in equipment renewal funds have already been allocated, with investments in urban renewal, new energy systems, and industrial networks still advancing.

To respond to the U.S.-China tariff war, China has lowered the threshold for departure tax refunds to attract foreign consumers and boost domestic demand. (AP)

China's manufacturing is strong, but consumption isn't equally strong

Fiscal policy can be expansionary, financial policy can be eased, the government can push infrastructure, equipment upgrades, and industrial investment, and it can reduce enterprise costs through subsidies and loans.

In January 2024, the State Council executive meeting proposed a package of fiscal and financial policies to jointly promote domestic demand, including support for household consumption, private investment, and financing for small and micro enterprises.

In response, 'Macro Marginal' pointed out that among China's three economic drivers, investment growth is negative, consumption growth hovers near zero, and only export growth remains strong. If exports slow as expected in the second half, the gap will mainly be filled by investment—this is precisely why there is such urgency around 'stabilizing investment.'

Beijing continues to promote industries such as AI, semiconductors, new energy, and advanced manufacturing. From an industrial upgrading perspective, this is undoubtedly strategically significant. However, if the pace of new supply consistently exceeds domestic demand growth over the long term, enterprises will ultimately have to rely on overseas markets to absorb capacity.