Strong Supply, Weak Demand, Little Urgency? | Economic Digest: July 2026

The H1 Economy | The K-Shaped Economy | Strong Supply, Weak Demand | Local Government | Involution & Overcapacity | Artificial Intelligence

“K shaped” is July’s defining buzzword, with a flurry of articles exploring China’s simultaneous boom and bust in different parts of the economy through this alphabetic metaphor.

The other phrase that completely saturates July’s collection of articles is “strong supply, weak demand”. The K-shaped metaphor describes the divergence, while “strong supply, weak demand” serves as the semi-official diagnosis of the structural imbalance behind it.

Even Li Daokui, who ostensibly pushes back against the K-shaped consensus, is really arguing that the metaphor is a distraction from the fact that the Chinese economy has been running cold for three years. In other words, the diagnoses are common ground. What is still heavily contested is where the transmission mechanism from investment into household demand has broken down and therefore what remedy should be applied.

The nearest thing to an official position comes in the form of a Qiushi commentary on the household consumption rate, published under its anonymous “special commentator” byline, with CASS’s Xu Qiyuan credited as drafter. It concedes that the investment-heavy model was historically appropriate, but lacks “long-term rationality”, though it quickly forecloses the transfer-based remedies suggested elsewhere with its disavowal of “helicopter money” and warns that the household consumption rate must not be “reduced to a rigid assessment task”.

Compared with the tone of marked concern apparent in the rest of the selection, it appears relatively sanguine. One might even read it cynically as co-option, rather than an adoption of the diagnosis, given that its immediate policy message is “historical patience and strategic resolve”, or less charitably, business as usual.

In contrast, calls for an immediate fiscal response are widespread in July’s collection and a large group of authors, including Li Daokui, Zhang Ming, Zhao Yanjing and Jia Kang, call for the central government itself to expand borrowing. Li in particular argues that the central government must relieve local governments, which have become “black holes” of economic energy.

Shen Jianguang and Fan Lei make a more modest version of the fiscal intervention case, arguing that expenditure has simply fallen behind the budget schedule and that more timely implementation might still replicate the 2024 pattern of growth being “suppressed at first, then buoyant later”.

There is also a disagreement about what fiscal intervention should prioritise. Li Daokui and Zhang Ming focus on relieving the property sector and local government balance sheets while others would prefer to see a more direct shift towards households and consumption. Liu Shijin makes the latter case most explicitly, arguing that stimulus should be redirected towards consumption, social security and households. He also most clearly cuts across the structural reform vs. macroeconomic stimulus divide, explicitly arguing that it’s not an either/or choice.

Two of the strongest pieces explicitly question how much balance-sheet expansion can achieve in the first place. Yang Ruilong describes K-shaped divergence as “fundamentally a structural problem” and argues that fiscal and monetary stimulus alone is insufficient because aggregate policy is failing to transmit effectively into the manufacturing and mid- and downstream sectors.

Cao Yuanzheng also claims that fiscal and monetary demand stimulus may only work temporarily. His theory is that the foundation of the Chinese economy is shifting from individual firms to the entire industrial chain and that imbalance is rooted in changes to the microeconomic foundations of the economy itself.

Elsewhere, Zhou Junzhi, providing the mechanism behind the K-divergence, explains that exports are no longer translating into domestic investment and argues that the “basic foundation” of household consumption is already relatively saturated—a claim also echoed by Sun Liping.

For most authors, AI threatens to further complicate the imbalance. Lu Ting warns that the boom could widen China’s K-shaped divergence and Huang Yiping describes a “substitution spiral” in which automation cuts labour income, weakens demand and encourages further automation.

Zhao Yanjing and Peng Wensheng both highlight China’s AI investment gap with the US, but draw opposite conclusions—Zhao favours open-source competition designed to undermine US profitability, while Peng calls for government-led catch-up investment.

Yin Jianfeng and Zhang Yang are more sanguine on AI, arguing that the existence of structural bifurcation in the economy due to a combination of path dependence in government policy, AI development and the energy transition is a long-term fact, and that “learning to dance with the K” is the only way to survive.

Taken together, this edition contains a remarkable range of competing prescriptions, but many do converge around a sense that insufficient demand and economic imbalance require a more urgent policy response.

It is ironic then, that the most recent piece in the collection—Zhang Jiqiang’s reading of the Political Bureau of the CPC Central Committee meeting held on 30 July—concludes that, in Zhang’s opinion, “the urgency of stepping up policy support is not high.”

— Jacob Mardell

In Brief