China’s cargo ship economy: Sailing on exports, sinking in the consumer hold

China’s Q2 growth print may have topped expectations, but beneath the headline lies a two-speed economy that’s still nursing a deep demand-side malaise. On paper, a 5.2% GDP gain looks like solid forward motion. In practice, it’s more like a cargo ship sailing briskly through a tailwind of external demand—while taking on water in the consumer hold.

Exports—especially to non-U.S. destinations—served as the temporary ballast, allowing Beijing to glide through a quarter that saw U.S.-bound shipments slump 24%. That global lifeline kept the vessel steady, but it’s not built for stormy seas. With the tariff ceasefire set to expire in mid-August, the market is quietly hedging against a sudden change in the trade winds.

Industrial production accelerated to 6.8%, and manufacturing output hit 7.4%—proof that China’s supply engine is still humming. But the domestic demand side of the ledger tells a different story: retail sales slowed to 4.8%, cosmetics and alcohol turned south, and even catering services lost altitude. It's a familiar script—factories produce, ports dispatch, but the Chinese consumer stays in a crouch.

The problem isn't liquidity—Beijing has pushed billions in government-subsidized buying power into home appliances and gadgets. The issue is confidence. Deflation has now persisted for nine straight quarters, a clear sign that consumers expect tomorrow’s prices to be lower than today’s. In that environment, you don’t spend—you wait.

Real estate, once the high-octane fuel of Chinese growth, remains stuck in reverse. Property investment plunged 11.2% year-to-date, and with no meaningful recovery in sight, the wealth effect that once powered middle-class consumption has been silenced. Meanwhile, fixed asset investment trudged ahead at just 2.8%, signaling that corporate capex is being guided more by political obligation than animal spirits.

Even Beijing’s data-polishing bureau had to admit there are “many unstable and uncertain factors” abroad, and that domestic demand is “insufficient.” The PBOC remains cautious, opting for targeted stimulus over broad-based easing. This is not a full-throttle policy response; it’s more of a drip-feed into selected arteries—equipment upgrades here, appliance rebates there—while hoping not to overwater zombie sectors.

Consumption’s contribution to growth fell below 53%, down sharply from over 60% a year ago. That marks a critical shift: the economic rebalancing narrative is quietly being shelved in favor of short-term stabilization through exports and state-directed spending. The compass may still point toward “dual circulation,” but for now, it’s the external engine doing the heavy lifting.

Looking forward, the second half will be a high-wire act. Front-loaded growth and subsidies have delivered a respectable first-half showing, but the base effects now turn treacherous. If exports wobble—especially under renewed tariff fire—the domestic side won’t be able to pick up the slack without more aggressive stimulus.

Markets sense this fragility. Equities gave back early gains, the yuan held flat, and bond yields barely blinked. There’s no panic, but no conviction either. Investors are in a holding pattern, waiting to see whether policymakers will step up with real counter-cyclical firepower—or simply ride out the cycle with optics and modest patchwork.

For now, China isn’t sinking—but neither is it surging ahead. It's coasting on global tailwinds and fiscal floatation devices, with the engine of domestic consumption still in dry dock. The risk is that if the seas turn choppy—via tariffs, deflation, or credit fatigue—the economy may not have the internal momentum to steer clear of rocks.