The world’s second-largest economy looks like it’s running at two speeds: An export-focused manufacturing sector that’s feeding global hunger for electronics and semiconductors, and a weaker domestic economy beset by sluggish sales, a property sector bust, and “involution,” China’s term for fierce, margin-suppressing competition.
“There’s remarkable resilience and bright spots in manufacturing and exports, and softness in consumption and fixed asset investment,” said Carol Liao, Greater China chair for Boston Consulting Group. “That’s been the pattern for a while now, since 2025.”
No ‘free handouts’
The pandemic marks a clean before-and-after in Chinese consumer behavior. Before COVID, consumption growth consistently outpaced GDP growth; since the pandemic, the reverse has held true, Liao said.
The most obvious culprit is the property market: falling home values have eroded household net worth for a population that holds the bulk of its wealth in real estate, discouraging spending. “This is about the willingness to spend, not ability,” 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 “welfarism” and “feeding lazy people.”
“China normally doesn’t give free handouts,” Liao said. Instead, Beijing prefers to “invest in people,” channeling money into human capital—like early-education subsidies, elderly care, and social safety-net spending—rather than 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 scale of the consumer market will continue to expand, the household consumption rate will rise markedly…and consumption’s role in driving economic growth will be further strengthened,” China’s State Council said.
The plan targets 60 trillion yuan, or almost $9 trillion, in annual retail sales by 2030. Yet Beijing’s ambitions are still modest: Hitting that target will need annual consumption growth of 3.7% over the next five years, well below the 5.0% pace recorded in the first half of the decade.
“It’s small steps, but it’s moving in the right direction,” Liao said. “Policymakers are very good at the supply side of things; they’re not so good at the demand side.”
Cars are the biggest drag—but not the whole story
There’s even a two-speed economy within China’s consumption numbers. Goods consumption is weak, while services consumption is outperforming, running above headline GDP growth, Liao said.
Cars have been a huge drag on China’s consumption numbers. Chinese automakers sold 1.6 million cars last month, a 23.2% drop from the same period a year earlier. The Chinese Passenger Car Association now predicts that total car sales will drop by 14% this year, to 20.4 million. (Here, too, exports are proving to be a bright spot: The country exported 1.1 million cars last year, a 70% year-over-year jump).
Two forces are compounding the slump, Liao said. The consumption subsidies that once nudged buyers toward electric vehicles and plug-in hybrids are “fading off a bit” after roughly two years in place. At the same time, “cut-throat competition” among domestic automakers has crushed margins across the industry and, perversely, discouraged some buyers from purchasing at all, as they wait for prices to fall further.
Yet the pullback isn’t universal. Basic necessities—dairy, rice, staples where supply is abundant and quality reliable—have become a hunt for the best price. “For things like dairy products and rice—basic daily necessities where supply is ample and the quality is pretty good—shoppers are looking for a bargain,” Liao said.
Discretionary “lifestyle” spending, by contrast, is holding up: Pop Mart’s Labubu dolls, pet care, and outdoor recreation are all categories where Chinese consumers are still willing to pay up. “This stuff adds color to people’s lives,” she said.
(Data collected by Zhaopin, a jobs platform, in March reported that “pet services” had the second-highest growth in hiring, after “robotics.”)
“Looking ahead, we expect funding support should continue to shift towards services consumption, which still offers significant untapped potential in China,” HSBC China economists Erin Xin and Taylor Wang wrote in a July 15 note.
What China exports has changed
Liao expects to see “stabilization or growth” in China’s economy in the second half of the year, thanks primarily 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, related to the AI investment boom.”
China doesn’t produce the most advanced chips used in AI processors from companies like Nvidia, but it dominates production of older-generation chips that go into phones, PCs, game consoles, and other consumer electronics; these are now in short supply as data-center construction consumes capacity that would otherwise serve consumer electronics makers.
The country’s chip manufacturers reported a staggering 2579% jump in profit for the first half of the year, according to data from the National Bureau of Statistics released on July 27.
Apple is even lobbying the Trump administration for approval to buy memory chips from CXMT, a Chinese manufacturer that’s currently the world’s fourth-largest producer of dynamic random-access memory. Specifically, Apple reportedly wants guarantees that Washington won’t add CXMT to its Entity List, which would impose licensing requirements on working with the company.
CXMT shares started trading on Shanghai’s STAR market on July 27, following a $9.8 billion IPO. Shares rose 470% on their first day, making the chipmaker the most valuable company listed in mainland China.
China’s “fitness center” economy
Liao invokes a metaphor now common among both Chinese officials and consultants: China’s domestic market as a “fitness center”—a phrase popularized by China’s No. 2 official, Premier Li Qiang, and echoed by figures like McKinsey Greater China chair Joe Ngai. “You really have the toughest exercise scheme in this market,” Liao said.
The competition is partly a creature of industrial policy. “When policymakers say that some industries will be priorities, local governments then encourage local champions to go into the market,” Liao said. This dynamic that has produced a glut of companies in favored sectors like green technology, electric vehicles, and semiconductors, chasing far more customers than the market, domestic or global, can support. “Unfortunately, people just need to fight it out,” she says.
Foreign companies have been struggling in China’s “gym.” Companies like Nike, Starbucks and General Motors have seen their sales plummet in China, as domestic consumers instead turn to high-quality and affordable local competitors.
However, Liao cautioned against seeing reading this as a sudden reversal. “Foreign brands have been losing share in China for about a decade,” she said. Nor is every foreign company struggling: Both Adidas and Lululemon have successfully grown their sales in China.
“A lot of the big multinational brands are known, but they’re not necessarily loved,” Liao says. “In today’s market, you have to be 100% suitable for 5% of the population—not 60% for 80% of the population.”
The companies that do succeed, Liao says, win by targeting a narrow niche with precision. She points to an unnamed instant-coffee brand that built its business almost entirely on Douyin, ByteDance’s domestic version of TikTok, by anchoring its marketing to two specific consumption moments: first thing in the morning, or right before a gym session. “You take it either at the beginning of the morning or before you go to the gym, and all their Douyin communications are focused on that specific occasion and that specific benefit,” she says.
‘Ferraris’ versus ‘Mercedes at Toyota prices’
In many ways, China’s AI push mirrors the “fitness center” dynamic Liao describes: a crowded, high-intensity environment where adaptability can matter more than size. Companies are not just racing to build the most powerful models–even though the title of China’s most capable model seems to change every six weeks—but to prove they can survive relentless competition while turning those models into viable businesses.
Liao spoke with Fortune hours after Moonshot AI released the newest version of its Kimi large language model, a system whose performance approaches offerings from OpenAI and Anthropic at a markedly lower price.
“China and the U.S. take quite different approaches to AI,” Liao says. “The U.S. really focuses on moonshots, no pun intended. China is all about ‘AI-plus,’ or applied AI.” She sums up the contrast in market terms: “The U.S. is technically more advanced, so they’re selling Ferraris at the Ferrari price. But we sell Mercedes at the Toyota price. That’s China’s strength.”
As in the U.S., Chinese executives are anxious about falling behind. “They’re very much afraid they’ve not caught the wave,” Liao says. “They want to embrace it.”
Carol Liao will be speaking at the Fortune Leaders Forum, held in Macau on Sep. 8. Learn more here!
In Fortune’s “Asia Agenda” column, released twice a month, we speak with Asia’s top business leaders about how they are building for the future and the lessons they’ve drawn from leading companies in one of the world’s fastest growing and most dynamic regions. Explore all of our profiles here.
