In May, the Chinese economy appeared divided into two parallel realities. A massive manufacturing boom surrounding artificial intelligence stands in stark contrast to the declining domestic consumption. Analysts at Citi note that this technological supercycle is the primary driver lifting the country’s overall metrics.

Production of high-tech goods, including chips, robotics, and electric vehicles, has surged to its fastest growth in five years. This has bolstered the industrial sector and overall export flows. According to Citi, there has also been a noticeable acceleration in investments in telecommunications and intellectual property within the country.

However, the domestic market paints a bleak picture. Retail sales have fallen sharply, marking the first decline since the pandemic, and failing to meet even the most pessimistic forecasts. Investment downturns have hit a one-year low. Citi warns of increasing risks of stagflation within the domestic economy, characterized by stable consumer prices alongside rising producer prices that can no longer be attributed solely to energy costs.

Despite the consumer sector’s struggles, advancements in AI are helping the economy remain afloat. Citi has kept its GDP growth forecasts unchanged for the second quarter and all of 2026, anticipating stability in the second half of the year due to low base effects.

At the same time, analysts are confident that Beijing will not resort to printing money but will instead implement targeted support measures. In July, China’s Politburo, the Communist Party’s elite decision-making body, is expected to discuss issues related to household incomes, but the threshold for widespread stimulus remains high. No expansion of the budget deficit or new quotas on government bonds is anticipated, although modest interest rate cuts are possible by year-end.

The current divide starkly illustrates that technology and exports are propelling the country forward, while the private sector and households are lagging behind. This situation is exacerbated by a prolonged real estate crisis, sluggish consumption since the COVID-19 pandemic, trade wars with the United States, and escalating tensions in the Middle East in 2026. Due to these risks, Beijing previously set a more conservative economic growth target for the current year.