China's economy grew at its slowest pace in more than three years in the second quarter, as weak household consumption overshadowed strength in manufacturing and exports, raising concerns about the long-term sustainability of the unbalanced growth model.

GDP growth was 4.3 percent from April to June, down from 5.0 percent in the first quarter, below the lower end of China's annual target of 4.5 to 5.0 percent, and missing expectations.

Attention now turns to the closely watched meeting of the Politburo of the Communist Party, scheduled for later this month, where top leaders typically assess economic conditions and adjust policies to keep growth on track... However, many economists believe the bigger challenge lies not in the pace of growth but in its composition.

Data on Wednesday showed retail sales rose 1.0 percent in June, while industrial output expanded 5.3 percent, indicating heavy reliance on global demand for manufactured goods, at a time when trade partners complain about China's imbalances and the Iranian war casts a shadow on the global economy.

Jin Hu, who runs a European goods importing company in eastern China, says her income has roughly halved since the beginning of the year due to lower sales, and an apartment she rents out has been vacant for months, reflecting the massive oversupply of housing in China and the prolonged property crisis. Hu adds, 'Except for necessary food expenses, I save as much as possible. I haven't bought a single piece of clothing in six months.' Still, the economy grew 4.7 percent from January to June, within the target range, reducing the urgent need for a large stimulus package.

Qiuyi Zhang, chief economist at Pinpoint Asset Management, doubts that the Politburo meeting will signal a wider fiscal deficit, given the current strength of exports. Zhang says, 'The government seems reluctant to spend fiscal resources and accumulate debt. There is a general consensus among policymakers and researchers that China needs to boost domestic demand. But there is no consensus on how to achieve that.'

* Declining investment and weak consumption domestically

Wages have not kept pace with overall economic growth and have even declined in some sectors. Industrial overcapacity, US tariffs, and price wars among producers have led to factory layoffs, while weak demand and accelerated adoption of artificial intelligence have slowed job creation in the administrative sector. The property market downturn has eroded household wealth and reduced construction jobs since 2021. Data showed real estate investment contracted 18 percent year-on-year in the first six months, while home prices also fell. Tens of millions of people have moved from formal jobs to the gig economy, now working long hours on transport and delivery service platforms for low wages with inadequate social security benefits.

Investment is also slowing, as local governments, long a key driver of investment in manufacturing and infrastructure—often blamed for creating overcapacity and misallocating resources—face mounting pressure to cut costs.

Emma Zheng, a 28-year-old nurse in Guilin (a major city in Guangxi province, one of China's less affluent regions), says her income has 'dropped sharply' due to underfunding in the local medical sector. Zheng adds, 'Previously, I would subscribe to fitness clubs, beauty salon cards, and Tencent Video, and replace my phone or iPad. Now, I don't dare spend money on such things.'

China's fixed asset investment contracted 5.7 percent year-on-year from January to June, with even government sector investment down 2.3 percent. Andy Ji, an analyst at ITC Markets, said, 'The main reason for the overall growth rate decline is the worsening downturn in domestic investment activity. Overall, an industrial engine driven by advanced technology, coupled with a sharp decline in domestic consumption and investment, highlights a significant disparity in economic growth momentum.'

* Strong exports

Reliance on exports to drive growth is increasing; trade data released Tuesday showed that external demand is so far compensating for weak domestic consumption, with exports beating expectations to rise 27 percent, driven by global AI growth. This partly reflects US retailers stockpiling goods ahead of Black Friday and Christmas holiday sales, before expected tariff increases later this year, according to shipping industry executives.

US President Donald Trump's visit to China in May maintained the détente between the world's two largest powers, but their trade relationship remains fragile.

The US imposed a 10 percent universal tariff, while the tariffs imposed by Washington in February expire next February, after the Supreme Court ruled some previous tariffs illegal on July 24, but they are widely expected to be replaced with higher ones. The US Trade Representative has proposed imposing a 12.5 percent tariff on imports from China and other countries, following an investigation into 'forced labor,' which Beijing denies. A final decision is expected in the coming months.

Furthermore, the European Union, whose average trade deficit with China reached $1 billion per day last year, is strengthening protection for its industrial clusters from Chinese competition. The renewed conflict between the US and Iran adds to uncertainty about global growth.

Larry Hu, chief China economist at Macquarie Group, said Beijing has little incentive to forgo external demand at present. He added, 'What will change the current situation is a failure of exports. When exports slow, to achieve the growth target, the government will make more efforts to support domestic demand.'