China Economy Loses Steam as July Data Misses, Exports Carry Load

China's economy lost momentum at the start of the second half of 2026. July data showed industrial production rising 4.5% year on year, below market expectations. Retail sales increased just 0.6%, also missing forecasts. The urban unemployment rate ticked up to 5.2% from 5%, a sign that labour market weakness could further constrain household spending, Krzysztof Kaminski, a markets analyst at OANDA, wrote in a note.

Fixed-asset investment fell 6.7% year on year in the January–July period, deepening from a 5.7% decline in the first half. The property sector remained the deepest drag. Investment in property plunged 19.2%, a record drop. New-home prices kept falling, making it harder to restore confidence among developers and households, Kaminski said. The prolonged property crisis is reducing companies' willingness to invest and weighing on household wealth.

Consumption stayed subdued. Passenger car sales fell 21% in July. The automotive sector accounts for roughly 8% of total retail sales of goods, so the drop matters. Car makers face high raw-material costs and intense price competition, squeezing profitability and limiting investment capacity, Kaminski noted. Weak car sales reinforce the picture of cautious households reluctant to spend.

Severe weather temporarily shut factories and ports in July. Kaminski said the impact should be temporary. Much of the weakness is structural. The property crisis and low propensity to consume cannot be explained by weather alone.

July Data Misses Expectations

One consequence of weak domestic demand is a growing reliance on exports. Overseas sales remain a main driver of activity while consumption and investment lag. The reliance on exports makes China more vulnerable to shifts in external demand and trade tensions, Kaminski wrote. The more exports matter, the more the authorities care about the yuan.

Prices added to the concern. Both consumer and producer inflation slowed more sharply than expected in July, reigniting worries about deflationary pressure. If households expect prices to fall further, they may delay purchases. Companies may postpone investment anticipating weaker demand and lower prices. Subdued price dynamics could reinforce the weakness in domestic demand, Kaminski said.

Exports and the Yuan Balancing Act

The foreign-exchange market reflects the growing importance of exports. China's foreign-exchange reserves, measured in the balance of payments, rose by $74.7 billion in the second quarter of 2026. The increase was the largest quarterly increase since the first quarter of 2014, Kaminski noted.

The yuan appreciated for a sixth consecutive quarter. The onshore exchange rate moved near its strongest level since 2023. Strong exports generated a substantial supply of dollars in the Chinese market, Kaminski wrote. For more on exchange-rate dynamics, see the forex market analysis.

The PBOC absorbed part of the foreign-currency inflows, limiting the pace of the yuan's appreciation. The central bank continued to set the official reference rate at a weaker level than the market expected. The fixing itself reached its strongest level in more than three years, Kaminski noted. That suggests the authorities are not trying to stop the yuan from strengthening altogether. They aim to control the pace, Kaminski said. An excessively rapid appreciation could weaken the price competitiveness of Chinese goods abroad while domestic demand remains weak.

China's central challenge remains the imbalance between a relatively resilient export sector and weak domestic demand. Consumption and investment are not strong enough to provide a solid foundation for balanced growth, Kaminski wrote. Weather-related drag may fade quickly. Addressing the structural problems will require more decisive action. Without a clear rebound in consumption and investment, the economy will remain dependent on exports and state support, Kaminski said. Hitting this year's growth target will become increasingly difficult.