China's Economic Growth Slows, Prompting Calls for Increased Fiscal Support

China's Economic Performance in Q2 2026

In the second quarter of 2026, China's economy showed signs of slowing down, achieving its lowest annual growth rate in over three years, which fell short of government expectations. This underperformance is likely to increase pressure on Beijing to enhance fiscal spending and introduce new measures to maintain economic growth throughout the year. Data from the National Bureau of Statistics (NBS) revealed that the country's gross domestic product (GDP) grew by 4.3 percent year-on-year during the April to June period, which is below the government's target range of 4.5 to 5 percent. Economists had anticipated a growth rate of 4 percent, while the economy had expanded by 5 percent in the first quarter. On a quarterly basis, GDP saw a 0.9 percent increase, marking the weakest growth in over two years. For the first half of 2026, the economy grew by 4.7 percent, presenting a challenge for policymakers to sustain this momentum for the remainder of the year.

Increased Fiscal Support Expected

The disappointing growth figures are likely to be a key topic at the upcoming Politburo meeting of the Communist Party. Analysts predict that the government may ramp up infrastructure spending and implement existing fiscal measures more vigorously, especially after recent expenditure cuts negatively impacted economic activity. Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc, noted, “There is room to speed up fiscal spending under the approved budget to support infrastructure investment.” He was one of the few forecasters who accurately predicted the annual GDP figure. Premier Li Qiang has also indicated that the government is considering additional policy options, emphasizing the need for “preparing and studying additional policies,” which suggests that more economic support could be forthcoming if necessary.

Mixed Signals in Economic Indicators

The latest economic indicators present a mixed outlook. Fixed-asset investment dropped by 5.7 percent in the first half of the year compared to the same period last year, a sharper decline than economists had predicted and worse than the 4.1 percent drop recorded from January to May. Conversely, retail sales showed a positive trend, increasing by 1 percent in June after a 0.6 percent decline in May, defying expectations of another downturn. Industrial production also surpassed forecasts, rising by 5.3 percent, while the urban unemployment rate slightly decreased to 5 percent from 5.1 percent the previous month. Mao Shengyong, deputy head of the NBS, attributed the second-quarter slowdown to temporary and external factors, stating that while some sectors like coal mining were affected, other industries remained stable.

Challenges in Domestic Demand and Investment

Despite robust exports and a resilient manufacturing sector bolstered by the global expansion of artificial intelligence, domestic demand continues to be a significant concern. Consumer spending and business confidence are hampered by the ongoing downturn in the property market. Retail sales, excluding automobiles, rose by 3 percent in June, while vehicle purchases plummeted by over 16 percent. Although the annual "618" online shopping festival helped mitigate declines in home appliance sales, economists believe that household spending remains weak. The GDP deflator turned positive for the first time since early 2023, primarily due to rising import costs, especially energy prices. However, analysts warn that underlying deflationary pressures persist due to excess industrial capacity.

Urgent Need for Policy Changes

Moody’s Analytics economist Sarah Tan remarked, “China’s economy is starting to ease off the accelerator,” highlighting that domestic demand is the weakest link in the economy. The prolonged property slump continues to impact household wealth and confidence, leading consumers to be cautious about spending and businesses to hesitate in making investments. Fixed-asset investment has emerged as a major concern, with property investment declining by 18 percent in the first half of 2026 compared to the previous year, marking the steepest drop since records began in 1992. Economists argue that this sharp contraction underscores the urgent need for stronger policy support. Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd., emphasized the necessity for growth-supportive policies in the second half of the year, particularly before the end of the third quarter. The upcoming Politburo meeting is now a focal point for economists. Additionally, structural challenges such as slowing investment, persistent domestic demand weakness, and employment concerns, especially as artificial intelligence reshapes the labor market, continue to pose risks. Li, a government adviser, cautioned that these employment and investment issues require serious attention to achieve economic goals.