China's economy grew at its slowest pace in over three years in the second quarter, as weak household consumption overshadowed strength in manufacturing and exports, raising concerns about the sustainability of the unbalanced growth model in the long term.

Gross domestic product grew by 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 now turns to the closely watched Politburo meeting of the Communist Party, scheduled for 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 heavy reliance on global demand for manufactured goods, even as trade partners complain about China's imbalances and the Iran war casts a shadow over the global economy.

Jane Hu, who runs a company importing European goods in eastern China, says her income has halved since the start 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 food expenses, I save as much as possible. I haven't bought a single piece of clothing in six months.' Still, the economy grew 4.7 percent from January to June, within the target range, reducing the urgent need for a large stimulus package.

Qiwei Zhang, chief economist at Pinpoint Asset Management, doubts the Politburo meeting will signal broader fiscal deficits given the strength of exports currently. Zhang says: '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.'

* Declining investment and weak consumption domestically

Wages have not kept pace with the overall economic growth, and have even fallen in some sectors. Overcapacity in industry, US tariffs, and price wars among producers have led to factory layoffs, while weak demand and accelerated adoption of artificial intelligence have slowed new job creation in the administrative sector. The property market downturn has eroded household wealth and reduced construction job opportunities since 2021. Data showed real estate investment contracted 18 percent year-on-year in the first six months, and home prices also fell. Tens of millions of people have shifted from formal jobs to the gig economy, now working long hours on ride-hailing and delivery platforms for low pay and inadequate 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 mounting pressure to cut costs.

Emma Qing, a 28-year-old nurse in Guilin, a major city in Guangxi province, one of China's less wealthy regions, says her income has 'dropped sharply' due to funding shortages in the local medical sector. Qing added: 'Before, I would subscribe to gyms, beauty salon memberships, and Tencent Video, and 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, 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 slump in domestic investment activity. Overall, an advanced technology-driven industrial engine, coupled 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 Tuesday showed that external demand is compensating for weak domestic consumption so far, 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 holidays, before expected tariff hikes 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 economies, but their trade relationship remains fragile.

The United States has imposed a universal 10 percent tariff, and the tariffs imposed by Washington in February will expire next year after the Supreme Court ruled some previous tariffs unlawful on July 24, but they are widely expected to be replaced by higher ones. 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 stepping up protection of its industrial clusters from Chinese competition. The renewed conflict between the United States and Iran adds to uncertainty about global growth.

Larry Hu, chief China economist at Macquarie Group, said Beijing has little incentive to abandon external demand at present. 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 more efforts to support domestic demand.'