Tech boom powers China's factories but economic imbalances deepen as consumption slows

China's industrial sector showed renewed strength in August as the AI-driven tech boom fuelled factory output, though sluggish consumption and a worsening investment slump reinforced concerns over deepening economic imbalances.

Tuesday's data highlighted a familiar fault line in the world's second-largest economy, where resilient manufacturing and exports are sustaining growth even as weak household spending and a property market downturn weigh on domestic demand.

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The divergence is likely to intensify pressure on Beijing to roll out more support measures as policymakers seek a more balanced recovery.

Industrial output grew 5.2 percent from a year earlier in August, quickening from a 4.5 percent increase in July and beating expectations for a 4.8 percent rise, figures released by the National Bureau of Statistics showed.

Strong expansion in equipment and high-tech manufacturing underpinned the production upturn.

Retail sales, a gauge of consumer activity, rose 0.4 percent, slowing from a 0.6 percent gain in July and below an expected 0.8 percent rise.

Weak consumption and the real estate market crisis dragged second-quarter gross domestic product growth to 4.3 percent, the slowest pace in more than three years and below the lower end of China's 4.5 percent-5.0 percent annual target.

"Barring an unexpectedly strong September, GDP growth will likely remain sluggish in the third quarter," said Lynn Song, ING's Greater China chief economist.

Oxford Economics lowered its 2026 growth forecast by 0.1 percentage point to 4.7 percent and cut next year's to 4.3 percent, from 4.6 percent, "reflecting a more prolonged property downturn which is likely to keep growth subdued despite stronger public investment," senior economist Sheana Yue said.

The data barely moved China's markets, leaving the key stock benchmarks down roughly 0.3 percent while the yuan weakened slightly against the dollar.

PROPERTY SLUMP, TECH BOOM

The latest data underscored the scale of the challenge facing policymakers as businesses remain reluctant to commit new capital and the property market continues to sap consumption and restrain growth.

Fixed-asset investment, which includes infrastructure and property investment, declined 7.2 percent in the first eight months, marking the steepest drop since April 2020.

Property investment dived 19.9 percent in the first eight months from the same period last year, and new home prices extended declines from the previous month, signalling a housing market still trapped in a prolonged downturn.

Against that backdrop, strong exports driven by AI infrastructure spending and demand for advanced technology products are providing a critical buffer for growth.

Investment in high-tech industries expanded 5.2 percent in the January-to-August period, in keeping with the global AI boom.

Output of lithium-ion batteries and industrial robots, for example, soared 57.2 percent and 34.6 percent year-on-year, respectively.

Behind the divide is a government push to guide resources to the advanced manufacturing sector to reduce the economy's reliance on property and bolster technological self-sufficiency, but the surge in high-tech investment has yet to translate into stronger household incomes or greater job security.

The nationwide urban surveyed unemployment rate came in at 5.3 percent for August, edging up from 5.2 percent the previous month.

GOVERNMENT PLEDGES FISCAL SUPPORT

Factory activity improved last month, but it remained in contraction and services activity stayed sluggish.

Weak domestic demand also weighed on credit growth, as new bank loans returned to positive territory but fell well short of analysts' forecasts after a record contraction in July.

Extreme weather likely remained a drag on activity. Four typhoons made landfall in China during August, disrupting operations in the east-coast manufacturing and logistics belt.

Growth also faces mounting external headwinds, including the Middle East conflict, elevated oil prices and a global tightening cycle that is keeping borrowing costs high.

"The external environment is complex and challenging, while domestic structural adjustment pressures persist, meaning sustained efforts are still needed to put the economy on a firmer growth trajectory," Fu Linghui, a spokesperson at the statistics bureau, told a briefing.

Beijing has responded to the challenges with faster government bond issuance and expanded loan interest subsidies for small private firms and consumers, while the central bank has pledged additional policy support without signalling explicit cuts to policy rates or banks' reserve-requirement ratio.

"Policymakers' reluctance to deploy a more forceful consumption-focused stimulus is likely to prolong the adjustment process," analysts at Barclays said in a note to clients.