China’s economy lost momentum at the start of the second half of the year, with industrial production and retail sales slowing sharply in July as weak domestic demand and severe weather disruptions added to pressure on policymakers to step up support.
The latest figures reveal a difficult start to the third quarter after economic growth in the second quarter slowed to its weakest pace in three and a half years. China’s continued reliance on exports to sustain activity is becoming increasingly important as household consumption and investment remain subdued, while U.S. tariffs and geopolitical tensions create additional risks.
Industrial output increased 4.5% in July from a year earlier, slowing from 5.3% in June and falling short of the 4.8% growth economists had expected, according to data released Monday by the National Bureau of Statistics.
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Fixed-asset investment provided an even stronger indication of the weakness in domestic activity. Investment contracted 6.7% during the first seven months of 2026, compared with expectations for a 6% decline and a 5.7% contraction in the first six months.
“The poor performance is due in part to ineffective use of the policy measures in hand. Fiscal spending has lagged behind, for example,” said Xu Tianchen, senior economist at the Economist Intelligence Unit.
“It’s a call for officials to be bolder about spending what they have,” he said, adding that policymakers needed to pay particular attention to investment because its sharp decline was “by no means acceptable to Beijing.”
The weakness in investment puts additional pressure on Beijing to increase fiscal support. Fu Linghui, an NBS spokesperson, said officials would step up counter-cyclical policy adjustments to strengthen domestic demand.
The bigger challenge is generating stronger household spending.
Retail sales increased just 0.6% in July from a year earlier, down from 1% growth in June and well below the 1.5% expansion economists had forecast. The slowdown came even during the summer holiday period, when tourism typically provides additional support to consumer spending.
Julian Evans-Pritchard, head of China economics at Capital Economics, attributed part of the weakness to the fading impact of government trade-in subsidies. The consumer-goods trade-in programme had boosted sales a year earlier by bringing forward demand, he said, meaning some of the current slowdown represents a difficult comparison with the previous year.
Citi analysts also found that the pace of subsidy distribution weakened in July. Daily average sales fell to 6.3 billion yuan, or about $934.8 million, from 9 billion yuan in June.
The property market remains another major obstacle to a consumer recovery.
New home prices fell 3.2% in July from a year earlier and declined 0.1% from June, extending pressure on a sector that has been a major source of weakness in China’s economy.
Housing is particularly important for household finances because economists estimate that about 52% of household wealth remains tied to real estate. That share has declined in recent years as the prolonged property downturn has encouraged households to diversify into assets such as gold.
With property values under pressure, households may be more reluctant to increase spending, limiting the effectiveness of policies designed to stimulate consumption.
Weather disruptions added another temporary but significant drag to economic activity in July.
Three typhoons made landfall during the month, forcing millions of people to relocate across manufacturing centers in eastern and southern China. The disruptions affected factories and retail activity at a time when the economy was already showing signs of losing momentum.
The automotive sector provides another example of the divergence between domestic weakness and external demand. Vehicle sales declined for a 10th consecutive month in July, although the pace of contraction eased.
Chinese automakers are increasingly looking overseas to compensate for weaker demand at home, intensifying their international expansion as domestic competition remains fierce.
Other indicators have also pointed to a soft start to the third quarter. China’s official manufacturing purchasing managers’ index unexpectedly slipped into contraction, while both export and import growth moderated from June, although both remained in double-digit territory.
Exports remain one of the economy’s strongest areas.
Chinese manufacturers have benefited from robust global demand for products linked to the artificial intelligence infrastructure boom, helping factories maintain production even as domestic consumption remains weak. China recorded another monthly trade surplus of more than $100 billion in July. The country’s full-year surplus is on course to exceed $1 trillion for a second consecutive year.
That export strength is increasingly creating tensions with trading partners.
The European Union is considering tougher measures to address its trade deficit with China, while the United States has announced additional tariffs on Chinese goods. Greater reliance on exports could therefore leave China’s economy more exposed to protectionist measures just as policymakers are attempting to compensate for weak domestic demand.
The combination creates a difficult policy equation for Beijing. Strong exports are supporting industrial activity, but a large trade surplus is increasing pressure from major trading partners. At the same time, domestic consumption and investment remain too weak to provide a reliable alternative engine of growth.
Chinese policymakers have pledged to accelerate fiscal spending and introduce new measures “in a timely manner,” but they have so far stopped short of announcing a major new stimulus package.
The latest figures could increase pressure for a more forceful response, particularly on investment and household consumption.
According to Reuters, Yuhan Zhang, principal economist at The Conference Board’s China Center, described the economy as showing “selective strength amid broad softness.”
“The question is, therefore, not simply whether China can sustain growth, but whether policy-supported pockets of activity can eventually generate a broader recovery in household spending and private investment,” Zhang said.
Fu remained confident that the recent weather disruptions would not derail Beijing’s target of keeping the roughly $20 trillion economy growing between 4.5% and 5%, saying the underlying foundation remained solid.
The July data, however, highlight the growing gap between China’s externally supported industrial economy and its weaker domestic economy. Manufacturing and exports continue to benefit from global demand, particularly from AI-related infrastructure spending, while households remain cautious and private investment is contracting.
That imbalance could become more difficult to sustain. If export growth weakens because of tariffs or slower global demand, China would have fewer sources of momentum to offset weak consumption and investment.
The immediate policy challenge for Beijing is therefore not simply maintaining headline growth. It is creating the conditions for households and private businesses to spend and invest again, reducing the economy’s dependence on exports and government-supported activity. Until that shift takes place, analysts believe China’s economy may continue to show pockets of strong industrial performance alongside a broader domestic recovery that remains elusive.