Shrinking Volumes, Rising Prices: China's Economy in the First Half of 2026

China’s gross domestic product for the first half of 2026 reached 69.57 trillion yuan, up 4.7% year on year. The absolute increase was the largest in five years for a comparable period. Yet the real story is hidden inside this number: some indicators are growing at double-digit rates, others are falling, and only together do they form a coherent picture.

The Half-Year in Numbers

• GDP: 69.57 trillion yuan, up 4.7%.
• Retail sales: 24.87 trillion yuan, up 1.3%.
• Foreign trade in goods: 25.47 trillion yuan, up 16.9%.
• Profits of large industrial enterprises: 3.95 trillion yuan, up 18.7%.
• Industrial value added: up 5.4%.
• Fixed-asset investment: down 5.7%.
• Foreign capital actually utilized: 402.1 billion yuan, down 5%.

Trade and profits are growing fast, investment is falling, and consumption has nearly stalled. EY analysts explain why this is not a random set of figures.

Shrinking Volumes, Rising Prices and the Letter K

The most telling story of the half-year is the gap between real and nominal growth. Real GDP growth slowed from 5% in the first quarter to 4.3% in the second, while nominal growth accelerated from 4.9% to 5.9%. The difference is prices: the GDP deflator ended 12 quarters of negative readings, rising from minus 0.06% to 1.53%. Three years of deflationary pressure have come to an end.

For companies, this is a change for the better, since price recovery directly supports profits. For the economy as a whole, the conclusion is more cautious. Volumes are shrinking while prices are rising, so nominal indicators look more convincing than real ones. EY states plainly that pressure on domestic demand persists and that a sustainable exit from the deflationary spiral remains in question.

The report’s key term is “K-shaped divergence.” Old and new growth drivers have split onto different branches: some segments are accelerating, others are contracting, and the national average no longer describes anything. New drivers (high-tech manufacturing, the digital economy and modern services) now account for more than 40% of economic growth, and policy is shifting from stabilizing aggregate volumes to raising efficiency.

The divergence is visible everywhere: services versus durable goods, online versus offline, cities versus the countryside, uneven profitability across industries, and housing markets in cities of different tiers moving in opposite directions. Among the “three engines” of growth, consumption and investment were weak, and net exports became the main support. For a country that has declared a shift toward relying on domestic demand, this is a source of vulnerability: exports depend on external conditions and tariff policies that China does not control.

Consumption: Caution and Shifts

Retail sales rose only 1.3% in the half-year. In June, month-on-month growth turned positive (plus 0.38%), suggesting that the bottom has been reached.

Durable goods sagged: from January to June, car sales fell 12.6%, household appliances and audio-video equipment 7.4%, and furniture 3.7%. The reasons are named directly: the fading effect of government subsidies and the cooling of the “discount wars.” Households are cautious about large and non-essential purchases.

Services and digital goods, however, keep growing: the transportation segment of the culture and tourism chain gained 6.1%, catering 4.9%, electronics 9.5%, and online sales of goods 4.8%. Rural consumption is outpacing urban consumption, and the gap widened to 1.3 percentage points in the first half. County and rural markets, supported by smart logistics and digital supply chains, are becoming the main arena for expanding domestic demand.

Industry and Investment

Value added of large industrial enterprises grew 5.4%, with a slowdown in the second quarter. Inside, the same split appears: high-tech manufacturing grew 14% and equipment manufacturing 9.7%, both accelerating from the first quarter. Total profits reached 3,948 billion yuan (up 18.7%), and profits in computer and telecommunications equipment manufacturing jumped 96.9% on strong demand in AI and semiconductors. The flip side: automakers and electrical machinery producers risk being squeezed between high costs and the inability to raise prices, and the high base effect will slow profit growth.

The most alarming figure in the report is the 5.7% decline in fixed-asset investment, with pressure intensifying in the second quarter. Infrastructure and manufacturing weakened in tandem, by 2.4 and 1.2 percentage points. Issuance of local special-purpose bonds slowed, most traditional infrastructure projects are behind schedule, and manufacturing investment is held back by weak final demand and rising raw material costs.

Yet the letter K shows up here too: investment in internet and related services rose 39.9%, and in optical fiber manufacturing 26.5%. For the second half, EY expects a recovery driven by projects under the “two major priorities” program, 800 billion yuan in quasi-fiscal instruments and construction of the “six networks,” which will pull along power generation, computing and communications, construction machinery and logistics. In the long run, everything comes down to one condition: restoring corporate profitability.

Exports and Foreign Capital

Foreign trade grew 16.9%, while the trade surplus is narrowing as imports grow faster than usually expected. Exports of integrated circuits rose 88.7% and electric vehicles 120%. In private companies’ exports, new materials (up 44.5%), electronic and information products (up 43.1%) and high-tech equipment (up 29.8%) are gaining ground. Behind this are the expansion of the AI industry and the global low-carbon transition. Imports of automatic data processing equipment and components rose 72.2% on demand for computing power.

The risks are outlined carefully: Section 301 tariffs will accelerate divergence in exports, with some products winning and others losing, and total volume remains vulnerable to swings in product prices.

Foreign capital is formally still negative, but the decline has narrowed to 5%, and year-on-year growth has been recorded for the second month in a row. R&D and design services grew 82%, and electronic and telecommunications equipment manufacturing 52%. After restrictions in manufacturing were fully lifted, a new package of 15 measures opens up education, finance and pharmaceuticals and simplifies cross-border mergers and acquisitions, data transfers and reinvestment.

Policy, AI and Real Estate

At the end of July, the Politburo chose the formula “make full use of existing measures and prepare additional ones in a timely manner”: countercyclical regulation is being strengthened, but without abrupt moves.

• Budget: faster issuance of local special-purpose bonds and ultra-long special treasury bonds, likely peaking in the third quarter, with more capital spending going to AI and advanced manufacturing.
• Money: the People’s Bank of China keeps a moderately loose stance but relies on targeted tools; supervision focuses on small financial institutions, real estate and the debts of local financing platforms.
• AI: the “Model and Data Resonance” program covers 20 key industries, from metallurgy to aerospace; the 2026-2028 platform economy plan provides for at least 100 pilot projects; 17 “AI + consumption” measures bet on smart homes, wearables and service robots.

The housing market has entered a new cycle, with the focus shifting from defusing risks to stabilization. The tools include government purchases of housing, easier lending, guaranteed delivery of homes and an urban renewal plan for the 15th Five-Year Plan period with investment of more than 15 trillion yuan. First- and second-tier cities will continue to recover, while third- and fourth-tier cities will focus on reducing inventory. Capital markets are being rebuilt around technology companies: new listing standards on the STAR Market and ChiNext and a dedicated channel for tech companies on the Hong Kong exchange.

What to Keep in Mind

The report is titled “building momentum amid volatility and divergence.” The economy simultaneously shows a record absolute increase and falling investment, an exit from deflation and sluggish demand, a surge in technology exports and a shrinking car market. Three caveats belong next to the optimistic numbers:

• an exit from the deflationary spiral is not guaranteed: prices have recovered, but domestic demand remains under pressure;
• the high base effect will slow profit and export growth in the second half;
• the investment recovery depends on fiscal instruments, and their impact depends on whether profitability returns to the industries that are supposed to invest on their own.

What matters is not the headline growth rate but which of the two branches of the K is getting thicker. In the first half of 2026, the upper branch (technology, services and high value-added exports) grew faster than the lower one shrank. The whole structure rests on that balance.