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

Gross domestic product grew 4.3 percent in the April-to-June period, 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 missing expectations.

Attention now turns to the Communist Party's Politburo meeting, closely watched and scheduled for later this month, where top 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 released Wednesday showed retail sales rose 1.0 percent in June, while industrial production 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.

Jane Hu, who runs an imported European goods company in eastern China, said her income has dropped by nearly half since the beginning of the year due to declining sales, and an apartment she rents out has been vacant for months, reflecting China's massive housing oversupply and prolonged property crisis. Hu added: "Except for necessary expenses on food, I save as much as possible. I haven't bought a single piece of clothing in 6 months." Still, the economy grew 4.7 percent in the January-to-June period, within the target range, reducing the urgent need for a large stimulus package.

Qiue Zhang, chief economist at Pinpoint Asset Management, doubts the Politburo meeting will signal a wider fiscal deficit given the current strength of exports. Zhang said: "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 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 rapid 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 construction sector job opportunities 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 ride-hailing and delivery platforms for meager wages and insufficient social security benefits.

Investment is also slowing, as local governments—long a main driver of investment in manufacturing and infrastructure and often blamed for creating overcapacity and misallocating resources—face growing 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 regions), said her income has "dropped sharply" due to funding shortages in the local medical sector. Qing added: "I used to subscribe to sports clubs, beauty salon cards, and Tencent Video, 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 in the January-to-June period, and even government sector investment fell 2.3 percent. Andy Ji, an analyst at ITC Markets, said: "The main reason for the decline in the overall growth rate is the worsening drop in domestic investment activity. Overall, a high-tech-driven industrial engine, coupled with a sharp decline in domestic consumption and investment, highlights a huge disparity in economic growth momentum."

* Strong exports

Reliance on exports to drive growth is increasing; trade data released Tuesday showed foreign demand is so far offsetting weak domestic consumption, with exports surging 27 percent, exceeding expectations and driven by the global AI boom. This partly reflects US retailers stockpiling goods ahead of Black Friday and Christmas sales, before expected tariff hikes later this year, according to shipping industry executives.

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

The US imposed a comprehensive 10 percent tariff, while the tariffs Washington imposed 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 by higher duties. The US Trade Representative has proposed 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 was $1 billion per day last year, is ramping up protection of its industries from Chinese competition. Renewed conflict between the US and Iran adds uncertainty to global growth.

Larry Hu, chief China economist at Macquarie Group, said Beijing has little incentive to forgo foreign demand for now. 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 greater efforts to support domestic demand."