Global Market: China’s AI boom lifts factory output as property slump deepens

China's industrial sector regained momentum in August as strong demand for artificial intelligence-related technology boosted factory output, while weak consumer spending and a deepening investment downturn highlighted growing imbalances in the world's second-largest economy.

Industrial output rose 5.2% year-on-year in August, accelerating from a 4.5% increase in July and exceeding the 4.8% growth forecast by economists, data from the National Bureau of Statistics showed on Tuesday.

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The improvement was driven by strong production in equipment and high-tech manufacturing, underscoring the growing importance of technology and advanced manufacturing to China's economic growth.

However, consumer demand remained weak. Retail sales increased just 0.4% from a year earlier, slowing from 0.6% growth in July and falling short of expectations for a 0.8% increase.

The contrasting trends underline a persistent challenge for Beijing, with manufacturing and exports providing support for economic activity while weak household consumption and a prolonged property crisis continue to weigh on domestic demand.

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According to Reuters, economists expect the divergence to increase pressure on Chinese policymakers to introduce additional measures aimed at strengthening consumption and stabilising growth.

Property slump weighs on investment

Investment remained a major drag on the economy. Fixed-asset investment fell 7.2% during the first eight months of the year, marking its steepest decline since April 2020.

Property investment was particularly weak, plunging 19.9% over the same period. New home prices also continued to decline, indicating that China's housing market remains trapped in a prolonged downturn.

The weakness in property and consumer spending has already affected overall economic growth. China's second-quarter GDP growth slowed to 4.3%, its weakest pace in more than three years and below the lower end of the government's 4.5%-5% annual growth target.

Oxford Economics cut its 2026 growth forecast by 0.1 percentage point to 4.6% and reduced its 2027 projection to 4.3% from 4.6%, citing expectations of a more prolonged property downturn.

AI boom provides growth support

While traditional areas of investment remain under pressure, China's technology sector is benefiting from the global artificial intelligence boom and government efforts to strengthen domestic technological capabilities.

High-tech industry investment increased 5.2% during the January-August period. Production of lithium-ion batteries surged 57.2% year-on-year, while industrial robot output jumped 34.6%.

The government has been directing resources toward advanced manufacturing and technology as it seeks to reduce China's dependence on the property sector and strengthen technological self-sufficiency, Reuters reported.

Strong exports linked to AI infrastructure and advanced technology products have also provided an important buffer for economic growth.

However, the rapid expansion of high-tech investment has yet to translate into a significant improvement in household incomes or employment conditions. China's nationwide surveyed urban unemployment rate rose to 5.3% in August from 5.2% in July.

More policy support expected

China's policymakers face a difficult balancing act as they attempt to support growth while addressing weak domestic demand and structural problems in the property sector.

Factory activity improved in August but remained in contraction, while services activity continued to show signs of weakness. Credit growth also remained subdued, with new bank lending returning to positive territory but falling well below expectations following a record contraction in July.

Extreme weather added to the pressure on economic activity. Four typhoons made landfall in China during August, disrupting manufacturing and logistics operations along the eastern coast.

External risks are also increasing, including geopolitical tensions in the Middle East, higher oil prices and tighter global financial conditions that could keep borrowing costs elevated.

Beijing has already accelerated government bond issuance and expanded loan interest subsidies for smaller private businesses and consumers. The People's Bank of China has also indicated that further policy support is possible, although it has not signalled immediate reductions in policy rates or banks' reserve-requirement ratios.

According to Reuters, analysts at Barclays believe the reluctance to deploy stronger measures focused on household consumption could extend the country's economic adjustment.

The latest figures suggest China's industrial sector is showing resilience, particularly in technology-driven areas, but the broader economy continues to face weak domestic demand, falling property investment and subdued consumer confidence. Sustaining growth may therefore require policymakers to shift greater emphasis toward household spending rather than relying primarily on manufacturing and investment.

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