China's Q2 economic growth cools to 3-1/2-year low as imbalances worsen

China's economy expanded at its slowest pace in more than three years in the second quarter, missing forecasts, with weak household consumption clouding strong manufacturing and exports and intensifying concerns over the long-term sustainability of its unbalanced growth model. At 4.3%, gross domestic product growth in April-June eased from the first quarter's 5.0%, landing below the lower end of China's 4.5% to 5.0% full-year target. The data adds pressure on Beijing to deliver more stimulus. But many analysts say a closely watched end-July meeting of the Communist Party's Politburo, a top decision-making body, may not flag major steps due to concerns over ballooning debt. Economists argue the bigger challenge is not the pace of growth but its composition. Wednesday's data showed retail sales rising 1.0% in June and industrial output expanding 5.3% — suggesting an overwhelming reliance on global demand for manufactured goods at a time when trading partners are complaining about China's imbalances and the Iran war weighs on the world economy. The onus is increasingly on exports to drive growth. Trade data on Tuesday showed external demand is so far compensating for China's internal weakness, with exports beating expectations with a 27% jump, riding the global AI boom. This partly reflected frontloading by U.S. retailers looking to secure inventories for Black Friday and Christmas sales before expected tariff hikes later this year. U.S. President Donald Trump's visit to China in May preserved the detente between the world's two largest powers, but their relationship remains fragile. A universal 10% U.S. tariff imposed by Washington in February, after the Supreme Court declared some earlier tariffs illegal, expires on July 24, but is widely expected to be replaced with higher levies. The U.S. Trade Representative has proposed a 12.5% tariff on imports from China and elsewhere following an investigation into forced labour, which Beijing denies, with a final decision expected in coming months. Moreover, the EU, whose trade deficit with China averaged $1 billion a day last year, plans to bolster protections of its industrial complex from Chinese competition. And renewed conflict between the U.S. and Iran is fuelling uncertainty over global growth. Larry Hu, Macquarie Group's chief China economist, said Beijing has little incentive to lean off external demand for now. "What will cause the current situation to change is when exports fail," Hu said. "When exports slow down, in order to still achieve the growth target, the government will do more on domestic demand." Domestically, wages have been sluggish, even declining in some sectors. Industrial overcapacity, U.S. tariffs and price wars among producers have fuelled layoffs in factories, while weak demand and faster AI adoption have slowed white-collar job creation. The property downturn has eroded household wealth and curbed employment in construction since 2021. The data showed property investment contracting 18% year-on-year in January to June, while home prices also eased. Tens of millions of people have fallen out of formal employment into the gig economy, working for ride-hailing and delivery platforms for long hours, low pay and inadequate social security benefits. Investment is slowing. Local governments, which have been a key driver of manufacturing and infrastructure investment and are often blamed for creating excess production capacity and misallocating resources, are now cutting costs, including payroll. Emma Cheng, a 28-year-old nurse in Guilin — a major city in Guangxi, one of China's fiscally weaker provinces — says her income "has fallen off a cliff" as the local medical sector is underfunded. "In the past I would get gym memberships, beauty salon cards, Tencent Video subscriptions and replace my phone or iPad," Cheng said. "I don't dare spend on such things now." China's fixed-asset investment shrank 5.7% year-on-year in January to June, with even state-sector investment dropping 2.3%. Separate data showed new bank loans rising less than expected in June. "The primary drag" on growth was the investment downturn, said Andy Ji, an analyst at ITC Markets. "A high-tech-driven industrial engine running alongside cratering domestic consumption and investment firmly highlights the economy's deeply uneven growth momentum." Jane Hou, who runs a European goods importing business in eastern China, says her income has roughly halved since the beginning of the year as her firm's sales have dropped. An apartment she rents out has been without a tenant for more than six months, a reflection of China's huge housing oversupply and prolonged property crisis. "Apart from necessary spending on food, I save on anything I can," said Hou. "I haven't bought a single piece of clothing in six months." Still, the economy grew 4.7% in the six months to June, within target, reducing the urgency for major stimulus. Morgan Stanley cut its full-year forecast to 4.6% from 4.8%. Zhiwei Zhang, chief economist at Pinpoint Asset Management, doubts the Politburo will signal a wider fiscal deficit, given that exports for now remain strong. "The government seems reluctant to spend fiscal resources and build up debt," said Zhang. "There is a general consensus among policymakers and researchers that China needs to boost domestic demand. But there is no consensus how to do it." A central bank official said monetary conditions were "relatively loose" at present, but pledged to support domestic demand.

China's Q2 economic growth cools to 3-1/2-year low as imbalances worsen

Second-quarter growth slows below target

Exports help for now, but trade risks remain

Investment weakens as consumption stays soft

Consumers and investment remain under pressure

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