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

GDP growth reached 4.3 percent during the April-to-June period, down from 5.0 percent in the first quarter, falling below the lower bound of China's annual target of 4.5 to 5.0 percent and missing expectations.

Attention is now turning to the closely watched Politburo meeting of the Communist Party scheduled for later this month, where top leaders typically assess economic conditions and adjust policies to maintain growth. 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 production expanded by 5.3 percent, signaling a heavy reliance on global demand for manufactured goods at a time when trade partners are complaining about China's imbalances and the Iranian war is casting a shadow over the global economy.

Jane Hu, who runs an European goods import company in eastern China, says her income has halved since the beginning of the year due to declining sales, and an apartment she rents out has remained vacant for months, reflecting China's massive housing supply glut and protracted real estate crisis. "Except for essential food expenses, I save as much as I can. I haven't bought a single piece of clothing in 6 months," she adds. Nevertheless, the economy grew 4.7 percent in the January-to-June period, which is within the target range, reducing the urgent need for a large stimulus package.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, doubts the Politburo meeting will signal broader fiscal deficit given the current strength of exports. "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," says Zhang.

* Declining Investment and Weak Domestic Consumption

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

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

Emma Zheng, a 28-year-old nurse in Guilin (a major city in Guangxi province, one of China's less wealthy provinces), says her income has "fallen sharply" due to funding shortages in the local medical sector. "I used to subscribe to gyms, beauty salon cards, and Tencent Video, and replace my phone or iPad. Now, I don't dare spend money on such things," Zheng added.

Investment in fixed assets in China contracted by 5.7 percent year-on-year during the January-to-June period, with even government sector investment falling by 2.3 percent. "The main reason for the decline in the overall growth rate is the worsening downturn in domestic investment activity," said Andy Ji, an analyst at ATC Markets. "Overall, an industrial engine driven by advanced technology, combined 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 on Tuesday showed that external demand is so far offsetting weak domestic Chinese consumption, as exports exceeded expectations with a 27 percent rise, driven by global AI growth. This partly reflects US retailers stocking up on large quantities of goods in preparation for Black Friday sales and the Christmas holidays ahead of expected tariff increases later this year, according to shipping industry executives.

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

The United States imposed a comprehensive 10 percent tariff, while the duties Washington imposed expire next February, after the Supreme Court announced the illegality of some previous fees on July 24, though it is widely expected that higher fees will replace them. The US Trade Representative has proposed 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, which had an average trade deficit with China of $1 billion per day last year, is working to strengthen the protection of its industrial complexes from Chinese competition. The renewed conflict between the United States and Iran is adding to global growth uncertainty.

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 the failure of exports. When exports slow down, to achieve the growth target, the government will exert more effort to support domestic demand."