Editor's note: Li Lintong, a special commentator for CGTN, is an assistant professor of economics at National School of Development, Peking University. The article reflects the author's views and not necessarily those of CGTN.

China's latest data do not offer a one-line verdict on the economy. Value added of industrial enterprises above the designated size rose 4.5% year on year in July, while consumer spending and investment were less buoyant. At the same time, value added in high-tech manufacturing grew 16.9%, significantly outpacing overall industrial growth. This divergence is the central fact behind the second-half outlook: Traditional sources of demand are still recovering while new sources of production and investment are gaining scale. The policy challenge is to protect the economy during that transition without slowing the shift toward a more productive growth model.

Looking beyond short-term fluctuations, China entered the second half with a relatively solid economic foundation. The economy grew 4.7% in the first half despite a difficult external environment and continued adjustment in real estate. More importantly, China's longer-term growth potential rests on two complementary sources.

First, sizable productivity gaps persist across many industries and occupations, reflecting the incomplete diffusion of frontier technologies and organizational practices. International technology transfer and domestic knowledge spillovers from leading firms and more productive regions therefore leave considerable scope for catch-up through technology adoption, managerial upgrading and human capital accumulation.

Second, China is no longer relying solely on catch-up. New momentum is already visible in high-tech manufacturing, artificial intelligence (AI) applications and green industries. As these advances spread through China's complete industrial system, they can create new demand while lifting productivity across the wider economy.

The July figures also clarify where endogenous momentum is emerging. High-tech manufacturing increasingly supports machinery, materials, business services and skilled employment, while advanced electronics and automation raise productivity across supply chains.

AI could amplify these spillovers if applied not as a standalone industry but as a general-purpose technology in factories, logistics, healthcare, energy and public services. China's diverse production base and large market enable successful applications to be widely tested and deployed at scale. The next challenge is diffusion: Smaller firms need affordable tools, interoperable standards and skilled workers so investment in computing capacity and models translates into lower costs, better products and new demand.

Green transformation provides another route from structural change to domestic growth. July's energy data showed rising output from hydropower, nuclear, wind and solar generation, with declining thermal power generation.

The significance goes beyond the energy mix. Smart grids, storage, charging facilities and energy-saving industrial equipment require long investment chains and create demand across manufacturing and services. Green and digital upgrading can also reinforce each other: Intelligent networks help integrate renewable electricity, while a cleaner and more reliable power system supports the expansion of data and computing infrastructure.

The weaker side of the picture is domestic demand. Fixed-asset investment fell 6.7% in the first seven months, with real estate remaining the main drag. Yet equipment purchases and investment in intellectual-property products both grew by around 9%.

In the first seven months, service retail sales increased 5%, compared with 1.1% for goods. The contrast suggests that demand has not disappeared; it is shifting toward different uses and remains constrained by confidence. Stabilizing housing expectations, improving household income prospects and giving private firms clearer market access would help convert precautionary saving and viable business plans into spending.

Two criteria should guide fiscal policy design. The first is the magnitude of its short-run demand multiplier. Support targeted at households with a high marginal propensity to consume, as well as productive firms facing binding financing constraints, is more likely to translate promptly into consumption, employment and new orders.

The second is the allocative efficiency of public investment. Fiscal resources should be directed toward projects supported by genuine demand, consistent with market signals and capable of generating adequate economic or social returns. Investment concentrated in low-productivity sectors or poorly utilized assets may support activity in the near term, but it can also deepen resource misallocation, weaken balance sheets and raise the cost of future adjustment.

Effective fiscal expansion therefore requires not only an appropriate scale of spending, but also an allocation that combines strong near-term multipliers with high long-term returns.

Monetary policy should give greater weight to securing a sustained recovery in prices. Weak price growth raises real interest rates, depresses corporate revenues and strengthens incentives to defer consumption and investment. A moderately loose stance can counter these forces by easing financial conditions and supporting aggregate demand. Its effectiveness should therefore be evaluated not only by credit growth, but also by its impact on nominal demand and inflation expectations. A durable price recovery would ease real debt burdens, improve corporate balance sheets and strengthen the transmission of monetary easing to private borrowing and expenditure.

China's second-half outlook warrants cautious optimism. External uncertainty and some softness in domestic demand may generate short-term fluctuations, but the economy's broader growth trajectory remains intact.

Substantial scope for productivity catch-up persists, while AI, advanced manufacturing and green upgrading are generating new sources of growth. The policy task is to strengthen demand so that this supply-side potential can be fully realized. Fiscal support should combine high short-run multipliers with efficient investment, while monetary policy should help secure a sustained recovery in prices. If these measures crowd in private spending and investment, growth can strengthen gradually and become more self-sustaining.

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