Beijing economists warn China economy split deepens on AI

China economy advisers are urging policymakers to address a widening split between an AI-fueled industrial boom and soft household spending, warning that weak demand could undercut long-term innovation.

The calls were made at a Saturday event hosted by the Beijing-based China Macroeconomy Forum, where several current and former government advisers said the gap between robust supply and subdued demand is becoming harder to ignore.

Advisers flag supply-demand mismatch after Q2 slowdown

The intervention follows a sharp loss of momentum in the second quarter, when growth slowed markedly and key activity indicators weakened. Advisers pointed to retail sales and investment growth cooling to rates not seen since the pandemic period.

Participants argued that the combination of strong production and fragile consumption is contributing to persistent downward price pressures. While they avoided blunt language, the discussion repeatedly returned to the difficulty of sustaining profits and confidence when demand does not keep pace with output.

Huang Haizhou, an adviser to the People’s Bank of China, linked the macro environment directly to the ability to build globally competitive technologies. He said a country stuck in deflation would struggle to generate the corporate profitability and risk appetite needed for frontier research and commercialization.

Deflation risks seen as obstacle to technology ambitions

Huang contrasted Japan’s long period of weak prices with South Korea’s more dynamic industrial base, pointing to South Korean chipmakers such as SK Hynix as evidence of how a healthier pricing and profit cycle can support advanced sectors. In his framing, prolonged deflation can sap investment incentives even in economies with strong industrial capabilities.

He argued that officials should aim for conditions consistent with “mild inflation,” including a positive producer price index, so firms can earn profits and reinvest. The emphasis on producer prices underscores concerns that factory-gate pricing remains a key constraint for industrial earnings.

A slide presented by Huang indicated that the latest inflation improvement is being driven more by rising costs than by a broad-based rebound in demand. That distinction matters because cost-led inflation can squeeze consumers and smaller firms, while still failing to create the sales growth needed to lift corporate revenues across the economy.

AI supercycle amplifies a K-shaped China economy

Advisers described the current pattern as increasingly “K-shaped,” with high-tech manufacturing and export-linked industries accelerating while consumer-facing sectors lag. They attributed part of the industrial strength to a global surge in spending tied to artificial intelligence, which has supported demand for chips and related equipment.

Official data have shown the divergence in multiple places, including industrial profits and inflation readings. Sectors benefiting from higher prices for inputs and strategic products—such as oil-related categories and semiconductors—have fared better than industries tied more directly to domestic discretionary spending.

The policy challenge, advisers suggested, is that an economy can post strong production and export numbers while still struggling to generate broad household confidence. In that scenario, factories may expand output faster than the domestic market can absorb, increasing the risk of weak pricing power and thinner margins outside the best-positioned industries.

The discussion did not lay out a single policy prescription, but the shared theme was a need to narrow the gap between supply and demand. That could mean measures that lift consumer spending and improve business expectations, so that AI-led gains do not remain concentrated in a narrow slice of the economy.

Next steps to watch include whether upcoming policy signals place greater weight on strengthening domestic demand, improving profitability at the factory gate, and preventing price pressures from turning into a longer-lasting drag on investment.