Deutsche Bank: China's economy poised to gain momentum on lower oil prices, policy support

China's economy performed solidly in the first half of 2026 and is likely to strengthen sequentially from the second quarter, supported by lower energy prices and additional policy measures to boost domestic demand, said Xiong Yi, chief economist for China at Deutsche Bank.

One factor underpinning the improved outlook is the retreat in global oil prices after tensions surrounding the Strait of Hormuz eased. Lower energy costs are expected to support downstream demand in both China and overseas, providing a tailwind for China's manufacturing, exports and consumer spending, Xiong said.

At the same time, he expects the government to step up fiscal support.

"We see the government implementing more policies to support domestic demand, especially in the services sector. Coupled with declining oil prices, we believe strengthening domestic demand will be a key support for China's growth in the second half of the year," he said.

Deutsche Bank has maintained its forecast for China's economy to expand by 4.7 percent in 2026, achieving the government's growth target ranging from 4.5 to 5 percent.

Looking beyond the near-term outlook, Xiong sees significant room for further expansion in services consumption. Deutsche Bank economists believe that Chinese household spending on leisure, tourism, healthcare, elderly care and childcare remains below that of economies with similar income levels, suggesting considerable untapped demand.

He said the Chinese government has been doing a lot more in unleashing the potential of Chinese consumer spending on the services sector. Measures include extending public holidays, encouraging workers to take longer annual leave, introducing spring and autumn school breaks, and expanding support for elderly care and other service industries.

"A key measure is cash handouts to families raising children, which began last year. This is a long-term policy, and the benefits could even potentially be increased in the future," he said.

"With these supportive government policies both on the supply and demand sides for services consumption, we see services spending becoming a longer-term driver for Chinese consumer spending, not just for this year, but for the next five to 10 years."

Xiong also highlighted what he described as a fundamental transformation of China's growth model over the past five years, with the economy becoming increasingly driven by innovation and technological competitiveness rather than investment and property.

"The Chinese economy is no longer primarily viewed as being driven by manufacturing or domestic investment," he said. "Instead, it is increasingly recognized for its competitiveness in the advanced technology sectors, particularly artificial intelligence, as well as other frontier technology sectors."

He believes the shift is also reflected in changing educational choices among young people, with growing numbers pursuing degrees in AI, computer science, mathematics and physics instead of business-related disciplines that were more popular five to 10 years ago.

"That shift will define China's long-term competitiveness and become the main driver of Chinese economic innovation," he said.

On the property market, Xiong said Deutsche Bank's latest research suggests the prolonged downturn may be approaching a turning point.

The bank is seeing encouraging signs in China's top-tier cities, including falling inventories in the existing-home market, stabilizing rental prices and modest rent increases.

"If these positive trends continue, we are hopeful that China's property sector will stabilize over the next one or two years," he said.