China’s economy grew by 4.3 percent in the second quarter compared to the same period last year, which is its slowest growth rate in the last three years. Data from the National Bureau of Statistics show that growth slowed down from 5 percent in the first quarter and was weaker than economists’ expectations.
This result confirms what Chinese leaders already indicated earlier in the year, when they set the lowest economic growth target for more than three decades. Although China still acts powerful from the outside, primarily through export-oriented production, the internal picture is much more complex.
Chinese factories are working at full capacity, especially in areas related to the global AI boom and energy transition. The country produces chips, batteries and electric cars for the world market, and exports jumped 27 percent in June compared to the same month last year. China’s trade surplus reached more than $125 billion, the second-highest monthly result in history. In the first half of the year, the value of Chinese exports increased by more than 20 percent.
However, it is precisely this strong export engine that masks weaknesses in the rest of the economy. The protracted real estate market crisis still has no clear end. Activity in the construction sector is strongly declining, which directly drags down economic growth. Jobs outside the factory sector are hard to find, wages are not growing enough, and consumers remain cautious.
Retail sales of consumer goods show volatility. In May, it fell for the first time since the end of the covid lockdown at the end of 2022, only to partially recover in June. This means that the Chinese economy relies more and more on exports, while domestic demand fails to take on the role that the authorities wanted to assign to it after the bursting of the real estate bubble.
Quarterly data show an even weaker picture. Compared to the previous quarter, the Chinese economy grew by only 0.9 percent. When that pace is converted to an annual level, the second quarter indicates a growth of 3.6 percent, well below the 6 percent in the first quarter. That is below the official target of 4.5 to 5 percent for this year.
Additional pressure on households came through rising fuel prices, linked to the war in Iran. China has tried to soften the blow by controlling prices at the pumps, but the cost of filling tanks is still double-digit higher than a year ago. This is why consumers drive less and fly less, at a time when they are already worried about the economy and inclined to save.
China’s economy is increasingly dependent on exports and the AI boom, while domestic consumption remains weak
One unusual positive signal is that rising fuel prices have helped push broader inflation back into positive territory. For more than three years, China has been struggling with deflationary pressures, i.e. falling prices in a wide part of the economy. Deflation is dangerous because it encourages consumers to delay purchases, expecting products to be cheaper later. The GDP deflator, a broad measure of prices across the economy, has been negative in 13 of the last 14 quarters, but moved into positive territory in the second quarter.
For China’s leadership, the key question now is how to boost spending and employment. Premier Li Qiang told entrepreneurs that the authorities are looking for new drivers of spending and ways to stabilize jobs. State planners announced the goal of annual retail sales reaching 8,850 billion dollars by 2030, which would mean a growth of about 20 percent compared to last year.
Beijing also promises higher wages and a greater share of household spending in the economy. This share is currently around 40 percent of GDP, while in most developed countries it is closer to 60 percent. The problem is that analysts do not see these goals as particularly ambitious, and Chinese consumers do not yet show a willingness to significantly increase spending.
Savings tips are becoming increasingly popular on Chinese social networks. Users recommend that unnecessary products be left in the online basket three days before purchase, in order to avoid impulsive decisions. Others suggest replacing foreign cosmetic brands with cheaper domestic alternatives, and even using baby lotion instead of more expensive skin care products.
At the same time, prices continue to fall in categories from cosmetics to cars. In the case of cars, the decline was further exacerbated by the end of the government purchase incentive program. From 2024 until last year, China used large subsidies to replace old cars, home appliances and phones, but the program only temporarily boosted sales. It did not solve the basic problem: the decline in real estate values, where most of the wealth of Chinese households is concentrated.
That’s why economists are now talking about a period of “payback” of previously stimulated sales. Purchases that were previously artificially boosted by subsidies are now absent, while households remain cautious due to falling property values and uncertainty in the labor market.
The Chinese economy is thus becoming more and more clearly divided into two parts. One consists of companies and workers benefiting from the global AI boom, high-tech manufacturing, chips, batteries and electric vehicles. The second is a much broader segment of the population that does not feel the direct benefits of this growth, but faces weaker wages, uncertain jobs and falling real estate values.
The real estate crisis particularly hit the construction sector. More than 14 million people lost their construction jobs, and many of them bought apartments in smaller cities, far from technology centers that could profit from AI investments. This further deepens the gap between those associated with new industries and those left without a secure foothold by the previous growth model.
Economists warn that China’s focus on high technology and semiconductors does not automatically benefit ordinary citizens. On the contrary, a strong industrial orientation towards automation and the AI sector can exacerbate structural unemployment and underemployment, especially among workers whose skills do not match the new economy.
An additional problem is income distribution. If the growth of the disposable income of the population remains below the overall economic growth, it means that a larger part of the national income goes to the state and companies, and not to consumers. In such a model, it is difficult to expect a strong recovery of domestic consumption, regardless of the industrial success of the export sector.
That is why the latest data do not only speak of the slowdown of the Chinese economy, but of its increasingly pronounced imbalance. China can still produce and export huge amounts of goods for the global market, especially in areas related to AI and green energy. But without a more stable real estate market, stronger wage growth and greater consumer confidence, that export success will not be enough to cover up all the weaknesses at home, writes and analyzes TNYT.