Investment in the sector fell by as much as 19.2%, marking a new record decline. At the same time, the pace of falling new-home prices accelerated again, making it harder to restore confidence among both developers and households. The prolonged weakness of the property market is reducing companies’ willingness to invest and is also weighing on household wealth and consumer sentiment.
Consumption remains a weak point of the economy
Consumption also remains subdued. The passenger car market provides a clear example, with sales falling by 21% in July. This is important for the broader economy because the automotive sector accounts for around 8% of total retail sales of goods.
Car manufacturers are also facing high raw-material costs and intense price competition, which are putting pressure on profitability and limiting their ability to increase investment. Weak car sales are another sign that households remain cautious and are reluctant to increase spending significantly.
Economic activity in July was also negatively affected by unusually severe weather conditions. Heavy rainfall, strong winds and flooding led to temporary closures of factories and ports, power supply disruptions and evacuations. The impact of these factors should be temporary, but much of the weakness in the Chinese economy is more persistent in nature. The property crisis, households’ low propensity to consume and subdued investment activity cannot be explained by adverse weather alone.
Exports are becoming an increasingly important engine of growth
One consequence of weak domestic demand is China’s growing dependence on exports as a source of economic growth. Overseas sales remain one of the main drivers of activity at a time when consumption and investment are not strong enough to generate more balanced growth.
However, such a growth structure also makes China more vulnerable to changes in external demand, trade tensions and exchange-rate fluctuations. The more important exports become, the greater the significance of the authorities’ policy towards the yuan.
Deflationary pressure increases the risk of further slowdown
Prices are another source of concern. In July, both consumer and producer inflation slowed more sharply than the market had expected. This once again increased concerns about mounting deflationary pressure.
Persistently weak price growth can become a problem in itself. If households expect prices to fall further, they may postpone purchases, while companies may delay investment in anticipation of weaker demand and lower prices. As a result, subdued price dynamics could further reinforce the weakness of domestic demand.
Strong exports support the yuan and increase foreign-exchange reserves
The growing importance of exports is also reflected in developments in the foreign-exchange market. China’s foreign-exchange reserves, measured in the balance of payments, increased by USD 74.7 billion in the second quarter of 2026. This was the largest quarterly increase since the first quarter of 2014.
