Economists suggest the "K-shaped divergence" in China's economy is becoming more pronounced as the nation navigates a period of transition between old and new growth drivers, with macro policies expected to intensify efforts to stabilize growth in the latter half of the year.
The year 2026 has reached its midpoint, revealing the increasingly distinct structural characteristics of the current economic recovery. On one hand, new growth drivers such as the AI industrial chain, high-end manufacturing, and foreign trade exports continue to expand, showing a steady rise in activity. On the other hand, domestic demand indicators like consumption and investment remain relatively weak. This "K-shaped divergence" between the trajectories of old and new forces has become a defining feature of the current economic landscape.
Simultaneously, the highly anticipated economic data for the first half of 2026 is about to be released. The National Bureau of Statistics will publish key indicators for the second quarter and the first half, including GDP growth, industrial output, consumption, and investment, on July 15. Economists participating in a chief economist survey forecast an average year-on-year GDP growth of 4.5% for the second quarter of 2026. They believe the "K-shaped divergence" pattern is intensifying during this transition phase, suggesting that macro policies are poised to ramp up support for growth stabilization in the second half. However, the expansion of new drivers is still insufficient to fully offset the waning of old ones, indicating the economy remains in a challenging transition period. This calls for proactive policy preparation, enhanced monitoring of the situation and risk warnings, and the formulation of contingency plans to use policy foresight to counter uncertainties in both domestic and external environments.
Mid-Year Economic Report on the Horizon
The Chinese economy operated generally smoothly in the first half, though some indicators have shown volatility since the second quarter, with particular pressure on domestic demand. Cheng Shi, Chief Economist at ICBC International, noted that first-quarter GDP growth of 5.0% year-on-year laid a relatively solid foundation for annual growth. Entering the second quarter, some indicators showed marginal softening, reflecting that the economy is still in a phase where the transition between old and new drivers coincides with demand recovery and structural adjustments. Structurally, the production side shows relative resilience, with external demand and manufacturing still providing support, while the recovery in domestic demand requires further consolidation.
Wang Han, Chief Economist at Industrial Securities, anticipates a V-shaped quarterly growth trajectory for the Chinese economy in 2026. High-tech manufacturing, exports, and the AI industrial chain are robust, but consumption, real estate, and traditional infrastructure remain sluggish, with the issue of weak domestic demand likely to be quite evident.
Leading indicators suggest some improvement. Influenced by strong export growth and a recovery in domestic demand, the Manufacturing Purchasing Managers' Index (PMI) for June stood at 50.3%, up 0.3 percentage points from the previous month, moving back above the expansion-contraction line. Non-manufacturing business sentiment also continued to improve, with industries related to new growth drivers maintaining an expansionary trend.
Zhang Liqun, a special analyst at the China Federation of Logistics & Purchasing, analyzed that the slight increase in the June PMI indicates a strengthening of economic growth momentum, particularly from innovation, with positive factors for economic recovery accumulating. However, it's important to note that the PMI for small enterprises mostly remains below the expansion-contraction line, with their production, new orders, and purchasing volume indices showing a marked contrast with those of large enterprises. This suggests that growth momentum has not strengthened comprehensively, and difficulties faced by some sectors and enterprises, especially small and micro businesses, should not be overlooked.
Year-on-year growth in total retail sales of consumer goods is expected to rebound in June due to base effects. A report from CICC's macro research team points out that the lower base for total retail sales from the same period last year should facilitate a marginal recovery in the year-on-year growth rate. It is forecast that total retail sales in June will grow by 0.5% year-on-year, returning to positive territory.
Lu Zhengwei, Chief Economist at Industrial Bank, noted regarding service consumption that under various disturbances, catering revenue growth in June 2025 fell to 0.9%, creating a low base. Additionally, with the first day of the 2025 Dragon Boat Festival holiday falling in May, the year-on-year growth rate for catering revenue in June is expected to rebound significantly due to the timing effect. Furthermore, the decline in oil prices in June has lessened its dampening effect on resident travel, and the year-on-year decline in domestic flight operations narrowed, aiding the recovery of service consumption.
Economists participating in the survey forecast an average growth rate of -4.7% for fixed-asset investment from January to June, slightly lower than the previously announced -4.1% for the period through May. Xie Yaxuan, Deputy Director of the Research and Development Center at China Merchants Securities, stated that fixed-asset investment in June should not be expected to weaken significantly further, but a marked recovery is also unlikely. The construction PMI remains below the critical point, indicating that government bond issuance and project fund allocation have not yet fully translated into construction intensity. New real estate starts, sales, and funds raised by developers remain in deep negative territory, and private investment confidence is also weak. Overall, the cumulative year-on-year growth for fixed-asset investment from January to June is estimated to be around -4.2%, a slight widening of the decline compared to January-May. However, with support from government bonds and special treasury bonds, the probability of the decline expanding rapidly further is not high.
Real estate investment remains a major drag. Wen Bin, Chief Economist at China Minsheng Bank, indicated that June high-frequency data shows that commercial housing transaction area in 30 major cities increased 13.7% month-on-month but fell 6.7% year-on-year. Land transaction area in 100 major cities rose 13.3% month-on-month but dropped 11.3% year-on-year, with the land premium rate rising to 11.58%. This suggests that land auction activity in core cities continues to improve, but developers overall remain cautious in land acquisition.
Boosting Consumption and Stabilizing Traditional Sectors
Xiong Yuan, Chief Economist at Guosheng Securities, previously pointed out that China is at an "inflection point year" in the transition between old and new growth drivers. The new economy, represented by AI and high-end manufacturing, will increasingly become the main incremental contributor to China's economy. The contribution of the old economy, represented by real estate and traditional infrastructure, will tend to stabilize, and its share should continue to decline gradually. The divergence essentially reflects an inevitable stage and outcome of China's economic transition between old and new drivers.
Against this backdrop, the recent quarterly meeting of the People's Bank of China Monetary Policy Committee for the second quarter of 2026 made a key adjustment to its assessment of the domestic economic situation. Beyond the original two challenges of "strong supply and weak demand" and "external shocks," it newly added "structural divergence," upgrading the pressures on economic operation from dual to triple challenges. As the "K-shaped divergence" becomes the core contradiction in the current domestic economic operation, the subsequent direction of macro policy efforts and the pace of monetary regulation are under close scrutiny.
In the process of underpinning the economy, how should policies focus on boosting consumption and stabilizing traditionally weak areas? And how should they prevent the misallocation of resources and funds circulating idly in strong sectors? Cheng Shi believes that, overall, the long-term underpinnings of the Chinese economy remain unchanged. Macro policy tools, a complete industrial system, technological innovation reserves, and a supersized market will continue to form an important foundation for stable and sustained economic growth.
Regarding consumption, Guan Tao, Global Chief Economist at BOC Securities, stated that the overall momentum of household consumption in China remains relatively weak, mainly attributable to four factors. First, last year's large-scale consumer goods "trade-in" policy front-loaded some demand for durable goods, and also reflected the tapering of national subsidy intensity and insufficient policy continuity. Second, it reflects the impact of commodity price fluctuations. Third, weather factors have a greater impact on consumption. Fourth, it is dragged down by weak real estate sales. He suggested that the next policy focus should center on implementing the "15th Five-Year Plan for Implementing the Employment Priority Strategy," further tilting towards stabilizing employment and increasing income. Only when residents' employment and income expectations show substantial improvement can consumer confidence be fundamentally repaired and consumption potential accelerated.
In the investment sphere, the National Development and Reform Commission recently announced that the third batch of "Two Major Projects" (national major strategic implementation and key area security capacity building) for 2026 has been allocated, arranging over 193.5 billion yuan in ultra-long-term special treasury bond funds. This completes the allocation of this year's "Two Major Projects" list. Wang Qing, Chief Macro Analyst at Dongfang Jincheng, stated that under this year's policy orientation of halting the decline and stabilizing investment, the growth rate of fixed-asset investment is expected to gradually turn positive later on. The recent slowdown in growth is more related to adjustments in policy implementation节奏, and infrastructure investment is expected to have room for acceleration in the second half, with full-year growth likely around 4% to 4.5%.
Monetary Policy's "Forward-Looking, Flexible, and Targeted" Approach
Wang Han believes that future macro policy will adhere to a combination of more proactive fiscal policy and appropriately accommodative monetary policy. With greater economic pressure in the second quarter, fiscal policy may significantly ramp up efforts in the second half. Monetary policy will coordinate, continuing to advance structural monetary policy tools and corresponding reforms.
In the aforementioned second-quarter meeting statement, the description of monetary policy placed greater emphasis on its "forward-looking, flexible, and targeted" nature. Liao Bo, Chief Macroeconomic Analyst at Northeast Securities, expects structural policy tools to continue exerting force, simultaneously strengthening structural guidance for credit, with key support directed towards expanding domestic demand, technological innovation, and small, medium, and micro enterprises. Special attention should be paid to new types of policy-based financial instruments playing a "quasi-fiscal" role.
Dong Ximiao, Chief Economist at Zhaolian, views this as highlighting a tactical upgrade of monetary policy from broad easing to precise regulation. Ming Ming, Chief Economist at CITIC Securities, explained that "forward-looking" means monetary policy operations will lead developments in the real economy and capital markets; "flexible" means operations will adjust promptly in and out; and "targeted" means the central bank will continue to increase focus on structurally supported areas in the next phase.
"To fundamentally reverse the 'K-shaped divergence' in the long term, we must rely on institutional reforms and technological innovation to significantly enhance total factor productivity. This requires coordinated efforts between central and local governments and close coordination between fiscal and monetary policies, which is not an overnight task," Ming Ming emphasized. Within the classic macro-control framework, central bank monetary policy and the Ministry of Finance's expansionary fiscal policy are conventional tools to address demand contraction. However, simple broad easing can no longer directly stimulate the willingness of the private sector to increase leverage; it also requires precise structural guidance and fiscal-financial coordination.
Ming Ming stated that for China's economy to break the "K-shaped divergence"僵局, it must rely on institutional reforms and technological innovation to boost total factor productivity. In terms of institutional reform, it is necessary to deepen fiscal and tax system reforms, advance the shifting of the consumption tax collection point to the retail stage and allocate it to local governments, breaking the constraints of the production location principle, and increase the share of labor compensation in primary distribution. Regarding technological innovation, AI will become the core engine driving the improvement of total factor productivity. Through the widespread adoption of technological红利 and the完善 of distribution mechanisms, it can drive a reshaping of the consumption landscape.