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

Attention now turns to the highly anticipated meeting of the Politburo of the Communist Party, scheduled for later this month, where senior leaders typically assess economic conditions and adjust policies to keep growth on track... However, many economists believe the biggest 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 trading partners complain about China's imbalances and the Iran war casts a shadow over the global economy.

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

Zhang Qiuwei, chief economist at Pinpoint Asset Management, doubts the Politburo meeting will signal a wider fiscal deficit, given the current strength of exports. "The government seems hesitant 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," Zhang said.

* Declining Investment and Weak Consumption Domestically

Wages have not kept pace with overall economic growth and have even fallen in some sectors. Excess industrial capacity, US tariffs, and price wars among producers have led to factory layoffs, while weak demand and faster adoption of artificial intelligence have slowed the creation of new jobs in the administrative sector. The property market downturn has eroded household wealth and reduced job opportunities in construction since 2021. Data showed real estate investment shrank 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, working long hours on ride-hailing and delivery platforms for meager wages and insufficient social security benefits.

Investment is also slowing, as local governments, long the main drivers of investment in manufacturing and infrastructure and often blamed for creating overcapacity and misallocating resources, face increasing pressure to cut costs.

Emma Cheng, a 28-year-old nurse in Guilin (a major city in Guangxi province, one of China's less wealthy regions), said her income has "dropped sharply" due to a lack of funding in the local medical sector. "I used to have memberships at sports clubs and beauty salons, subscribe to Tencent Video, and replace my phone or iPad. Now I don't dare spend money on such things," Cheng added.

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

* Strong Exports

Reliance on exports to drive growth is increasing; trade data released Tuesday showed external demand is so far compensating for weak domestic consumption, with exports beating expectations with a 27 percent rise, 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 executives.

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

The United States imposed a comprehensive 10 percent tariff, while the tariffs imposed by Washington in February are set to expire next February, after the Supreme Court ruled some previous tariffs unconstitutional on July 24, but they are widely expected to be replaced by higher tariffs. 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.

Moreover, the European Union, whose average trade deficit with China reached $1 billion per day last year, is stepping up protection of its industrial sectors from Chinese competition. The renewed conflict between the United States and Iran adds to uncertainty over global growth.

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