The Chinese economy maintained decent growth in H1, on the back of export front-loading, the consumption goods trade-in program, high single digit growth of infrastructure and manufacturing fixed asset investment (FAI). While we expect positive contributions from export front-loading and transshipment to gradually fade in H2, fiscal policy has room to scale up if external demand falls too quickly and it serves as the buffer during growth engine transition.

Export tailwinds likely to fade. Year-to-date exports grew at 6% year-over-year (yoy), higher than full year export growth of 5.8% in 2024, despite US tariffs on China remaining at approximately 40%. The better-than-expected export momentum is supported by strong front loading and transshipment, on back of 90-day reciprocal tariff suspensions for most countries (excluding China, effective from April 9^th) and a separate 90-day reciprocal tariff suspension for China (effective from May 12^th). We expect export growth to moderate in H2, as front-loading is eating future demand and as potential tariff increases after the 90-day suspension on other countries may weigh on the transshipment. With that, we expect net exports will become a drag on Gross Domestic Product (GDP) growth in H2 shifting from a GDP contributor in H1 (equivalent to +1.5 percentage points based on our estimate).

Fiscal support to stay. Fiscal policy has been effective in H1, as evidenced by a strong improvement in private consumption, decent infrastructure and manufacturing FAI. Year-to-date retail sales grew at 5% yoy, higher than 2024 full year growth of 3.5%, on the back of expanded fiscal support to goods trade-in program (i.e., more funds are allocated to goods trade-in and more items are included). Year-to-date infrastructure FAI grew at 10.4% yoy and manufacturing FAI grew at 8.5%, both demonstrating resilience backed by fiscal. We expect consumption growth to be in the range of 3.5-4.5% in H2, reflecting continued policy support (People's Bank of China, PBoC, just announced CNY500 billion relending to boost up services and elderly consumption) while some lagged negativity from consumption front-loading. We expect infrastructure and manufacturing FAI to stay at high single digit growth on accelerated Local Government (LG) special bond deployment.

Growth engine transition to be continued. The “old economy”, mostly related to the real estate sector, remained subdued. Real estate FAI is still in deep contraction, secondary housing prices saw initial signs of stabilization in tier-1 cities but nationwide prices remain in a downward trend. Primary housing market transaction volume did improve driven by housing policy support announced in the fourth quarter (Q4) of last year, but moderated again recently. In general, we expect the “old economy” to remain in a slowing path in H2.

The “new economy”, mostly related to advanced manufacturing, continued to gain traction. Renewable energy deployment accelerated significantly, with wind and solar power plant capacity surpassing that of coal for the first time, and renewable energy already reached 57.3% of total power plant capacity. The gap between China and global top artificial intelligence (AI) models continued to narrow, and an AI ecosystem is taking shape led by top Chinese tech companies. AI integration in manufacturing and healthcare is making progress as well, backed by government support.

Investment implications. With fiscal policy proving effective in H1 and with GDP growth remaining above 5%, we expect that fiscal support will focus on existing policy deployments in Q3 rather than exploring new initiatives. Against such a scenario, government bond issuance has likely surpassed its peak unless external conditions deteriorate faster than expected and new fiscal measures are introduced. Monetary policy will remain accommodative but stay on the sideline as well, given short-term deposit rates are nearing zero and net interest margins (NIM) are reaching record lows. Therefore, we continue to favor CGB (Chinese Government Bond) duration but don’t foresee a strong rally as seen in 2024.