There appears to be two speeds in the world’s second-largest economy: an export-focused manufacturing sector feeding the global hunger for electronics and semiconductors, and a weaker domestic economy plagued by sluggish sales, a collapse in the real estate sector and “involution,” China’s term for tough, margin-squeezing competition.
“There is notable resilience and bright spots in manufacturing and exports, as well as weakness in consumption and fixed investment,” said Carol Liao, chair of Greater China at Boston Consulting Group. “This has been the pattern for some time, since 2025.”
No “free handouts”
The pandemic marks a clean before and after in Chinese consumer behavior. Before COVID, consumption growth always exceeded GDP growth; Since the pandemic, the opposite has been the case, Liao said.
The most obvious culprit is the real estate market: Falling property values have reduced household net worth in a population that holds most of its wealth in real estate, discouraging spending. “This is about willingness to spend, not ability,” says William Bratton, head of cash equity research, APAC at BNP Paribas wrote in a July 22 note.
Chinese officials remain allergic to direct cash transfers, with President Xi Jinping warning against both “welfare politics” and “feeding lazy people.”
“China doesn’t usually give out free handouts,” Liao said. Instead, Beijing prefers to invest in people and put money into human capital – such as subsidies for early education, elder care and social safety net spending – rather than in checks to households.
On July 13, China unveiled its first-ever standalone five-year plan for consumption, part of the broader 15th Five-Year Plan. “By 2030, the overall size of the consumer market will continue to grow, the consumption rate of households will increase significantly… and the role of consumption as an engine of economic growth will be further strengthened,” China’s State Council said.
The plan targets annual retail sales of 60 trillion yuan, or nearly $9 trillion, by 2030. However, Beijing’s ambitions are still modest: achieving this goal requires annual consumption growth of 3.7% over the next five years, well below the 5.0% pace seen in the first half of the decade.
“It’s small steps, but it’s going in the right direction,” Liao said. “Policymakers are very good on the supply side, but they are not so good on the demand side.”
Cars are the biggest burden – but not the whole story
China’s consumption figures even reveal a two-speed economy. Goods consumption is weak, while services consumption is above average and above GDP growth, Liao said.
Cars have taken a toll on Chinese consumption. Chinese automakers sold 1.6 million cars last month. a decrease of 23.2% from the same period a year earlier. The Chinese Passenger Car Association now predicts that overall passenger car sales will increase fall by 14% this year, to 20.4 million. (Again, exports prove a bright spot: the country exported 1.1 million cars last year, a 70% increase over the previous year).
Two forces are exacerbating the slump, Liao said. The consumption subsidies that once motivated buyers towards electric vehicles and plug-in hybrids are “phasing out a little” after about two years. At the same time, “cutthroat competition” among domestic automakers has squeezed margins across the industry and, perversely, discouraged some buyers from buying anything at all while they wait for prices to fall further.
But the withdrawal is not universal. Basic needs – dairy products, rice, staple foods, the supply of which is plentiful and the quality reliable – have become a hunt for the best price. “For things like dairy products and rice – everyday staples whose supply is plentiful and the quality is quite good – shoppers are looking for a bargain,” Liao said.
In contrast, discretionary “lifestyle” spending remains: Labubu dolls from Pop MartPet care and outdoor recreation are all categories that Chinese consumers are still willing to pay for. “This stuff brings color to people’s lives,” she said.
(Data collected by Zhaopin, a job platform, in March reported that “Pet Services” had the second-highest growth in hiring after robotics.)
“Looking forward, we expect financing support to continue to shift towards service consumption, which still has significant untapped potential in China.” HSBC wrote Chinese economists Erin Xin and Taylor Wang in a July 15 note.
What China exports has changed
Liao expects the Chinese economy to “stabilize or grow” in the second half of the year, mainly thanks to exports.
The export boom looks different than in previous cycles, she argued. “It’s not the traditional, low-value-added stuff,” she says. “It’s advanced manufacturing tied to the AI investment boom.”
China doesn’t produce the most advanced chips used in AI processors from companies like… Nvidiabut it dominates production of older-generation chips used in phones, PCs, gaming consoles and other consumer electronics devices; These are now in short supply as the construction of data centers consumes capacity that would otherwise be available to consumer electronics manufacturers.
This was reported by the country’s chip manufacturers a stunning profit jump of 2579% for the first half of the year, according to data released on July 27 by the National Bureau of Statistics.
Apple is even lobbying for the Trump administration to get approval to buy memory chips from CXMT, a Chinese manufacturer that is currently the world’s fourth-largest manufacturer of dynamic random access memory. Specifically: Apple allegedly wants guarantees that Washington will not add CXMT to its entity list, which would impose licensing requirements to work with the company.
CXMT shares began trading on Shanghai’s STAR Market on July 27 following a $9.8 billion initial public offering. Shares rose 470% on the first dayThis makes the chip manufacturer the most valuable listed company on the Chinese mainland.
China’s “gym” economy
Liao invokes a metaphor now common among Chinese officials and advisers alike: China’s domestic market as a “gym” – a phrase popularized by China’s second-ranking official, Premier Li Qiang, and taken up by figures such as… McKinsey Greater China Chairman Joe Ngai. “They really have the toughest training program in this market,” Liao said.
Competition is partly a creature of industrial policy. “When policymakers say some industries will be a priority, local governments encourage local champions to enter the market,” Liao said. This dynamic has led to a flood of companies in favored sectors such as green technology, electric vehicles and semiconductors that are chasing far more customers than the market, whether domestic or global, can support. “Unfortunately, people just have to fight it,” she says.
Foreign companies are struggling in China’s “gym.” Companies like Nike, Starbucks And General Motors have seen sales decline in China as domestic consumers turn instead to high-quality and affordable local competitors.
However, Liao cautioned against interpreting this as a sudden about-face. “Foreign brands have been losing market share in China for about a decade,” she said. Not every foreign company has problems either: both Adidas And Lululemon have successfully increased their sales in China.
“Many of the big multinational brands are well-known but not necessarily popular,” says Liao. “In today’s market you have to be 100% suitable for 5% of the population – not 60% suitable for 80% of the population.”
According to Liao, the companies that are successful win by targeting a narrow niche. She points to an unnamed instant coffee brand that built its business almost entirely on Douyin, ByteDance’s domestic version of TikTok, by targeting its marketing at two specific consumption moments: first thing in the morning or right before a gym session. “You take it either early in the morning or before you go to the gym, and all Douyin communications are focused on that special occasion and that specific benefit,” she says.
“Ferraris” against “Mercedes”. Toyota Prices’
In many ways, China’s AI push reflects the “gym” dynamic that Liao describes: a crowded, high-intensity environment where adaptability can be more important than size. Companies are vying not just to build the most powerful models – although the title of China’s most powerful model seems to change every six weeks – but to prove they can withstand the relentless competition and turn those models into profitable businesses.
Liao spoke along Assets Hours after the release of Moonshot AI the latest version its large language model Kimi, a system whose performance approaches OpenAI and Anthropic’s offerings at a significantly lower price.
“China and the US have very different approaches to AI,” says Liao. “The US is really focused on moonshots, no pun intended. China is all about ‘AI-plus’ or applied AI.” She sums up the contrast in terms of the market: “The US is more technologically advanced, so they sell Ferraris at the Ferrari price. But we sell.” Mercedes at Toyota price. This is China’s strength.”
As in the United States, Chinese leaders fear falling behind. “They are very afraid that they didn’t catch the wave,” says Liao. “They want to embrace it.”
Carol Liao will speak at the Fortune Leaders Forum in Macau on September 8th. Find out more here!
In Fortune’s twice-monthly Asia Agenda column, we speak to Asia’s top business leaders about how they are preparing for the future and what lessons they have learned from leading companies in one of the world’s fastest-growing and most dynamic regions. Discover everything Our profiles here.