China’s suffering from mild deflation, but considering the challenging circumstances, the world’s second-largest economy held up reasonably well during the first half of 2025. Data released on Friday suggests the “resilient” China narrative may be cracking, though.

For most of this year, surprisingly strong export growth kept the lights on in an economy struggling to combat a burgeoning balance sheet recession. Despite (and in some sense because of given the pull-forward effect ahead of tariff implementation) Donald Trump’s trade war, China’s on track to run a $1 trillion+ trade surplus. Monthly export growth’s topped expectations repeatedly as Beijing shipped more to other locales to make up for a pronounced decline in trade with the US.

Of course, that didn’t do anything to address anemic domestic demand, which is arguably China’s biggest problem. And although factory activity was bolstered by front-loading as global buyers attempted to get what they could from “the world’s factory” before “Tariff Man” moved to cut off end-arounds and curb transshipments, that fillip was bound to fade.

Sure enough, Beijing on Friday said industrial production rose just 5.7% YoY in July, a meaningful deceleration from June’s near 7% pace and the slowest since November. Worse, retail sales managed just a 3.7% advance, the slowest this year and down more than one full point from the prior month’s YoY jump.

This was a poor result all the way around from the monthly activity series, and it left the spread between IP and retail sales growth at 2ppt, indicative of sluggish domestic demand compared to relatively strong factory and mine production.

Friday’s raft of data also showed the urban jobless rate rose to 5.2% (no one trades that), while new and used home prices fell 0.31% and 0.55% from June, respectively. The former counted as the largest drop since October.

“While industrial production remained healthy, it was mainly supported by exports, which have remained resilient for now, while domestic demand slowed unexpectedly and notably,” SocGen’s Michelle Lam and Wei Yao remarked, adding that the slowdown in retail sales growth suggested the impact of Beijing’s subsidies program is “waning.”

Do note: The new yuan loans series actually showed a decline for July in data released mid-week. That’s a big deal.

As the figure shows, it’s quite rare that Chinese are net re-payers, where “quite rare” means it’s never happened before. As far as I can tell, there isn’t a single negative print on that series in data going back decades, which is to say July was a first.

That, perhaps more than any other datapoint, validates the “balance sheet recession” label, and underscores the notion that the PBoC’s pushing on a string. The problem isn’t the cost of credit, nor the availability of loans. The problem is demand. Headline CPI was flat in July, another sign of an icy domestic economy and producer prices contracted a 34th month.

Amusingly, fund managers are the most optimistic in months about China’s growth prospects.

The figure above’s from the August installment of BofA’s monthly fund manager poll, in which a net 11% of panelists expected a stronger Chinese economy, the highest net share since March.

The good news for anyone predisposed to an optimistic view is that Xi will say China met this year’s growth target regardless, so in that sense anyway, predicting a 5% expansion’s a riskless proposition. If all else fails (and it probably will), the NBS can always use the deflator to flatter the real growth prints.