- Industrial activity will be constrained by overcapacity and potential exports slowdown.
- Excess supply is particularly apparent in real estate with investment falling.
- Household sentiment is under pressure from weak job prospects and declining income growth.
- Against this backdrop, corporates are doubtful on further capital expenditure.
- Implications for forecast: We expect additional 20bps LPR and 50bps RRR cuts to support growth in 2H
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July's data prints signalled a slowdown in 2H25. New RMB loans fell by RMB 50bn, marking the first negative print in 20 years, while outstanding loan growth slipped to a two-decade low of 6.9%. Both mid- to long-term corporate and household loans declined, likely reflecting early repayments. The M1–M2 gap narrowed, but weak credit data suggests that incremental liquidity has yet to fully transmit into the real economy.
Industrial production
Industrial activity is constrained by overcapacity. Corporates are expected to scale back production amid the “anti-involution” campaign. This campaign sets out laws to reduce price wars and impose stricter liability on firms engaged in unfair competition. Industrial production growth slowed slightly from 6.4%yoy in 1H25 to 6.3%yoy in the first seven months. Emerging sectors such as NEVs, robotics, and tech hardware lost momentum in July. Capacity utilization fell to a post-COVID low of 74% in 2Q25, and reports indicate that major EV manufacturers are shutting down production plants.
On external demand, July’s export growth accelerated due to front-loading and recent trade talks offer positive signals. However, the broader trade outlook is uncertain. US transhipment tariffs will hinder China's trade performance, risking prolonged overcapacity and disinflation.
Producer Price Index (PPI) saw the 34th contraction of 3.6%yoy in July accordingly. Industrial profit growth declined for two consecutive months since April due to narrowed profit margins.
Fixed asset investment (FAI)
Against this backdrop, corporates are doubtful on further capital expenditure. FAI growth slowed to its weakest pace since 2020 COVID lockdowns, dropping from 2.8%yoy in 1H25 to 1.6%yoy YTD in July. Private FAI contracted further from -0.6%yoy in 1H to -1.5%yoy ytd, while state-led investment also cooled, particularly in infrastructure and tech hardware. Meanwhile, foreign direct investment plunged by 15.7% as foreign corporates are increasingly sceptical on investing in China amid trade tension.
Property investment
Excess supply is particularly apparent in the real estate sector with investment falling -12.1%yoy YTD, compared with -11.2%yoy in June. Developers continue to prioritize completing unfinished projects, while new residential starts remain in double-digit decline. With residential inventory equivalent to roughly 26 months of turnover, property prices are expected to remain under pressure.
Retail sales
Household sentiment is under pressure from weak job prospects and declining income growth. Homeowners are therefore allured to early mortgages repayment. Meanwhile, short term householloan also dropped 45%yoy in the first 7 months of this year. Retail sales growth eased to 4.8%yoy in July ytd, down from 5.0%yoy in June, despite subsidies for durable goods like home appliances and electronics.
Looking ahead
China’s real funding cost (1Y LPR-CPI) remains elevated at 3.0%, well above levels in the US and Japan. Against this backdrop, the PBoC is expected to maintain an accommodative stance to lower real borrowing costs and encourage reinvestment rather than early loan repayment.
We anticipate another 20bps reduction in 1-year Loan Prime Rate 3Q25. The central bank is also likely to continue easing through quantitative measures, having already injected RMB1.7trn into the financial system via open market operations last quarter. Short-term 2-year CGB yields should come under renewed downward pressure, after previously falling to around 1.0%. Meanwhile, long-term yields are likely to remain supported by increasing bond supply from fiscal policy initiatives.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
[email protected]
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