The Chinese economy grew at its slowest pace in over three years during 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 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 is now turning to the closely watched Politburo meeting of the Communist Party, scheduled for later this month, where top leaders typically evaluate economic conditions and adjust policies to maintain the growth path. However, many economists believe the biggest challenge lies not in the pace of growth, but in its composition.

Data released Wednesday showed retail sales rose 1.0 percent in June and 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 manages a European goods import firm in eastern China, says her income has halved since the beginning of the year due to falling sales, and an apartment she rents out has remained vacant for months, reflecting a massive oversupply of housing in China and a prolonged real estate crisis. Hu adds, "Except for essential food expenses, I save as much as I can. I haven't bought a single piece of clothing in 6 months." Nevertheless, the economy grew by 4.7 percent from January to June, which is within the target range, reducing the urgent need for a major stimulus package.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, doubts the Politburo meeting will signal broader fiscal stimulus given the current strength of exports. "The government seems reluctant to spend financial resources and accumulate debt," Zhang says. "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."

Investment decline and weak domestic consumption: Wages have not kept pace with overall economic growth and have even fallen in some sectors. Surplus industrial capacity, U.S. tariffs, and price wars among producers have led to factory layoffs, while weak demand and the accelerating adoption of AI have slowed new job creation in the administrative sector. The real estate downturn has eroded household wealth and reduced construction job opportunities since 2021. Data showed real estate investment contracted by 18 percent year-on-year in the first 6 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-sharing and delivery platforms for low wages and inadequate social security benefits.

Investment is also seeing a slowdown, as local governments—long a key driver of investment in manufacturing and infrastructure, and often blamed for creating excess capacity and misallocating resources—face increasing pressure to cut costs.

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

Investment in fixed assets in China contracted by 5.7 percent year-on-year from January to June, with even government-sector investment falling by 2.3 percent. Andy Gee, an analyst at ITC Markets, said: "The main reason for the lower overall growth rate is the worsening decline in local investment activity. Overall, a high-tech-driven industrial engine, combined with a sharp decline in domestic consumption and investment, highlights a major disparity in economic growth momentum."

Strong exports: Reliance on exports to drive growth is increasing. Trade data released Tuesday showed that foreign demand is so far offsetting weak domestic Chinese consumption, with exports exceeding expectations with a 27 percent rise, driven by global AI growth. This partly reflects U.S. retailers stockpiling large amounts of goods in preparation for Black Friday sales and Christmas holidays, ahead of expected tariff increases later this year, according to shipping executives.

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

The U.S. imposed a comprehensive 10 percent tariff, while the tariffs imposed by Washington are set to expire next February after the Supreme Court declared some previous fees illegal on July 24; however, it is widely expected that they will be replaced by higher duties. The U.S. 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. The 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 sectors from Chinese competition. The renewed conflict between the U.S. and Iran is increasing uncertainty regarding global growth.

Larry Hu, chief China economist at Macquarie Group, said Beijing has little incentive to abandon foreign demand at the moment. "What would change the current situation is the failure of exports. When exports slow down, to meet the growth target, the government will make more efforts to support domestic demand."