China’s artificial intelligence (AI) sector emerged as the country’s strongest engine of economic growth in the second quarter of the year, contributing more than half of quarter-on-quarter expansion despite a broader slowdown in the economy, according to an analysis by Capital Economics.
China’s economy expanded by 4.3% year-on-year in the second quarter, easing from 5.0% in the previous quarter and missing market expectations.
However, the slowdown masked strong momentum in electronics manufacturing and information technology (IT) and telecommunications services, sectors closely linked to the rapid adoption of AI.
Capital Economics estimated that the broader information and communications technology (ICT) sector contributed 1.4 percentage points to annual GDP growth during the quarter, accounting for around one-third of China’s overall economic expansion.
On a quarter-on-quarter basis, the ICT sector contributed 2.0 percentage points to China’s annualised growth rate of 3.6%, representing more than half of total growth and roughly double its average contribution in recent years.
Growth in electronics manufacturing was underpinned by rising semiconductor production as overseas demand strengthened for Chinese-made chips and computing equipment.
Although China remains a limited producer of the most advanced processors used to train frontier AI models, it has become a major supplier of mature semiconductors and hardware that support AI infrastructure.
The IT and telecommunications sector also became the largest contributor to growth in the services industry, outperforming the combined contribution from retail, hospitality and transportation.
Meanwhile, industrial activity weakened in other areas of the economy. Lower production of refined fuel and petrochemicals, partly linked to the disruption caused by the Iran war, weighed on manufacturing output and contributed to the moderation in overall GDP growth.
Capital Economics warned that supply constraints could curb further expansion in the near term. Capacity utilisation in China’s electronics industry has climbed to its highest level since the pandemic-driven consumer electronics boom, while memory chip production is already operating close to full capacity.
Manufacturers have responded by accelerating investment. Fixed investment in electronics manufacturing rose by 6.5% year-on-year during the first half of the year, contrasting with a broader decline in overall investment spending across the economy.
Several new memory chip fabrication plants are expected to begin operations over the next year, increasing production capacity by more than one-third.
Capital Economics said the continued expansion of AI-related industries could help offset weakness in other sectors of the Chinese economy.
However, it cautioned that increasing dependence on AI leaves China’s growth outlook more vulnerable to any slowdown in global demand for AI technologies and infrastructure.
