Can you see the K? | The weekly recap

China's economy has a shape problem.

For years now, we have highlighted the structural imbalances at the heart of China's economy – weak consumption, over-reliance on exports, and a persistent supply-demand mismatch. 

• In recent months, those imbalances have well and truly come to a head – welcome to the K-shaped economy.

The upper arm of the K is powered by AI and clean-energy exports. Semiconductor exports more than doubled year-on-year in June and computer hardware shipments grew by more than half. 

• The manufacturing sectors plugged into global AI demand are humming – capacity is expanding, orders are strong, and profits are up sharply.

The lower arm tells a very different story. Domestic demand is barely holding on – retail sales of goods grew just 1.0% y/y in June, and household incomes are rising at their slowest pace on record, outside of the pandemic. 

And with demand this weak, manufacturers without exposure to the AI export boom are pulling back sharply on investment: 

• Auto manufacturing fixed asset investment collapsed in June, while investment in manufacturing facilities for furniture, footwear, and paper products also shrank.

The message from the domestic economy is unmistakable – firms simply don't see any reason to build capacity.

The result is that Q2 real GDP grew just 4.3% y/y – the slowest reading in over three years – despite an export boom that would ordinarily have carried the economy to a strong quarter. 

• The AI and exports story is real – it just isn't enough to offset what's happening at home.

Beijing, to its credit, has taken note.

• At its July meeting, the central bank (PBoC) formally named "structural divergence" as a challenge facing the economy for the first time. 
• Separately, at an economic symposium, Premier Li Qiang pledged to "increase counter-cyclical adjustments" and boost consumption. 
• And on July 13, the State Council published a five-year plan on expanding consumption, promising to "better leverage consumption's foundational role in economic development."

That all sounds encouraging – but read the fine print, and our enthusiasm quickly fades.

• The consumption five-year plan contains virtually no new demand-side policy support. Its central bet is on so-called latent demand – the idea that Chinese households want to spend more, but are held back by an inadequate supply of high-quality services and a lack of trust in domestic products. 
• The prescriptions accordingly focus on supply-side fixes – enforcing product standards, expanding healthcare and education options, and building better consumption infrastructure. 
• Fix the shelves, in other words, and the shoppers will come.

Herein lies the crux of the problem: Beijing continues prescribing a supply-side cure for what is fundamentally a demand-side ailment. 

• Until Chinese households have more money in their pockets and stronger safety nets to fall back on, no amount of supply-side support is going to loosen consumer wallets.

So where do we go from here? Policymakers will have an opportunity to signal whether a more forceful policy response is on the way at the late-July Politburo meeting, which sets the economic policy tone for the second half of the year. 

• We'll be looking for any sign that Beijing is prepared to move beyond incremental measures and confront the demand-side weakness head-on. 

But on the evidence of the past week, the smart money is on continuity – recognition of China's structural divergence, without the decisive action needed to reverse it. 

• For now, that leaves the K-shape – and all the vulnerabilities that come with it – set to define the rest of 2026.

Joe Peissel, Senior Macroeconomic Analyst, Trivium China

What you missed

US-China

In a July 16 address, US President Donald Trump accused China of carrying out the “largest compromise of election data in history,” alleging that Beijing obtained records on 220 million US voters during the 2020 election cycle.

• China’s embassy in Washington flatly denied the allegations, saying China “has never and will never interfere” ​in US presidential elections.

Foreign affairs

On July 10 and 11, respectively, Xi Jinping and Premier Li Qiang met with North Korean Premier Pak Thae Song.

• Notably absent from either meeting readout was mention of North Korean denuclearization.

Econ and finance

In Q2, China’s real GDP grew 4.3% y/y, down from 5.0% in Q1 and the slowest reading in over three years.

• Nominal growth – which incorporates price effects – accelerated to 5.9%, the fastest rate since early 2023.
• The divergence is driven entirely by cost-push inflation from the Iran war, with higher input prices artificially inflating the value of economic activity rather than reflecting stronger volumes or demand.

In a July 16 video interview with Qiushi – the Party’s leading theoretical journal – influential policy advisor Yin Yanlin pushed back against what he sees as a misreading of China’s weak demand. 

• His message: Aggregate policy should be more decisive and forceful – and structural or long-term reform agendas shouldn’t dilute short-term countercyclical stimulus.

Commodities

The commerce ministry (MofCom) imposed a “temporary export ban” on helium, effective immediately and with no stated end date.

• With helium prices sky-high since March, and the reignited Middle East conflict threatening further disruption, Beijing is ensuring opportunistic distributors cannot export for profit at the expense of domestic supply security.

Tech

Xi Jinping delivered the keynote address at the World AI Conference (WAIC) in Shanghai.

• Xi championed AI’s benefits, backing open-source collaboration and calling for more innovation and wider real-world application.
• But he also leaned unusually hard into the risks, asking “as algorithms make decisions, how is safety ensured?”

China and 28 other countries signed an agreement establishing a new intergovernmental body – the World AI Cooperation Organization (WAICO) – in Shanghai.

• Founding members include Brazil, Indonesia, Malaysia, Cambodia, Kazakhstan, Pakistan, Russia, Serbia, Belarus, Cuba, Venezuela, South Africa, and others.

Politics

Xinhua published the official charge sheet against former Xinjiang Party secretary Ma Xingrui.

• Notably, the notice didn’t include any hint that Ma is in trouble for anything other than graft.
• By comparison, the only other two sitting non-military Politburo members purged since 2012, Bo Xilai in 2012 and Sun Zhengcai in 2017, were painted as political threats.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.