China's 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 the unbalanced growth model.

GDP growth stood at 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 between 4.5 and 5.0 percent, and defying expectations.

Attention now turns to the Politburo meeting of the Communist Party, which is closely watched and scheduled to be held later this month, where senior leaders typically assess economic conditions and adjust policies to maintain the growth trajectory... 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, and industrial output expanded 5.3 percent, indicating a 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 on the global economy.

Jane Hu, who runs a company importing European goods in eastern China, says her income has fallen by about half since the beginning of the year due to lower sales at her company, and an apartment she rents out has been vacant for more than months, reflecting the massive housing oversupply in China and the prolonged real estate crisis. Hu adds: 'Except for essential food expenses, I save as much as possible. I haven't bought a single piece of clothing in six months.' Nevertheless, the economy grew 4.7 percent from January to June, within the target range, reducing the urgent need for a large stimulus package.

Chui Zhang, chief economist at asset management firm Pinpoint, 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.'

* Investment decline and weak consumption domestically

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 layoffs in factories, while weak demand and accelerated adoption of artificial intelligence have slowed the creation of new jobs in the administrative sector. The real estate market downturn has eroded household wealth and reduced job opportunities in the construction sector 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 on transport and delivery service platforms for long hours, with low wages and insufficient social security benefits.

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

Emma Qing, a 28-year-old nurse in Guilin (a major city in Guangxi province, one of China's less affluent provinces), says her income has 'dropped sharply' due to a lack of funding in the local medical sector. Qing added: 'Previously, I subscribed to sports clubs, beauty salon cards, and Tencent Video service, and I would 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 falling 2.3 percent. Andy Ji, analyst at ITC Markets, said: 'The main reason for the decline in the overall growth rate is the worsening downturn in domestic investment activity. 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 compensating for weak domestic consumption, with exports exceeding expectations by rising 27 percent, driven by global growth in artificial intelligence. This partly reflects US retailers stockpiling goods ahead of Black Friday sales and Christmas holidays, before expected tariff increases later this year, according to shipping industry 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 tariff of 10 percent, while the tariffs imposed by Washington in February are set to expire next February, after the Supreme Court ruled some previous tariffs unlawful on July 24 last year, but they are widely expected to be replaced by higher tariffs. The US Trade Representative has proposed imposing tariffs of 12.5 percent 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 strengthening protection of its industrial complexes from Chinese competition. The renewed conflict between the United States and Iran adds to the uncertainty about global growth.

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