China AI Fuels Over Half Q2 Growth
China’s artificial‑intelligence sector has become a key driver of economic growth, accounting for more than half of the country’s quarter‑on‑quarter expansion in the second quarter, according to an analysis by Capital Economics. The economy grew 4.3% year‑on‑year in Q2, slowing from 5.0% in the previous quarter and falling short of expectations. This headline figure masked a sharp increase in activity across electronics manufacturing and information‑technology and telecommunications services.
Capital Economics estimated that the broader information and communications technology (ICT) sector contributed 1.4 percentage points to annual GDP growth during the quarter, representing about one‑third of China’s total economic expansion. On a quarter‑on‑quarter basis, the sector provided 2.0 percentage points of China’s 3.6% annualised growth, roughly twice its contribution in recent years.
Electronics manufacturing was supported by rising semiconductor production, with overseas demand for Chinese chips and computing equipment increasing. Although China is not a major producer of the advanced processors used to train frontier AI models, it supplies mature chips and hardware that underpin AI infrastructure. Capacity utilisation in the electronics sector rose to its highest level since the pandemic‑era consumer‑electronics boom, with memory‑chip output already close to capacity.
IT and telecommunications also became the largest contributor to services growth, exceeding the combined contribution from retail, hospitality, and transportation. Industrial activity weakened elsewhere, partly reflecting lower refined‑fuel and petrochemical production linked to the Iran war, which contributed to the slowdown in overall GDP growth.
Supply constraints could limit near‑term production gains. Manufacturers are expanding production in response; fixed investment in electronics manufacturing increased 6.5% year‑on‑year during the first half, contrasting with a broader contraction in investment spending. Several new memory‑chip fabrication plants are expected to begin operating over the next year, potentially expanding production capacity by more than one‑third.
AI‑related activity could continue offsetting weakness in other parts of the Chinese economy, though greater reliance on the sector leaves growth exposed to any downturn in global AI spending.