China economic growth slows to 4.3 percent as domestic demand falters

China’s economy expanded at its slowest pace in over three years during the second quarter of 2026, growing 4.3% year-on-year, according to official data released Wednesday. The figure marked the weakest growth since the fourth quarter of 2022 and fell short of the government’s 4.5% to 5% annual target, underscoring persistent challenges in reviving domestic demand and stabilizing a property sector in crisis.

The National Bureau of Statistics (NBS) reported that the slowdown was driven by weak household consumption and declining fixed-asset investment, even as exports surged due to global demand for high-tech goods and electric vehicles. Retail sales in June rose 1.0% year-on-year, outpacing forecasts but reflecting broader caution among consumers. Industrial production, however, climbed 5.3% in June, fueled by manufacturing output and a boom in semiconductor and data-processing equipment exports.

The data highlighted a deepening imbalance between strong supply and weak demand, a contradiction the NBS described as “prominent” in its statement. Fixed-asset investment contracted 5.7% year-on-year in the first half of 2026, with property investment falling 18% and infrastructure spending declining. Analysts pointed to a prolonged property crisis, which has eroded household wealth and curbed employment in construction since 2021, as a key factor. Jane Hou, a European goods importer in eastern China, said her income had halved in 2026, with her rental property vacant for six months. “I haven’t bought a single piece of clothing in six months,” she said.

Exports, meanwhile, remained a critical lifeline. June’s exports jumped 27% year-on-year, driven by the global AI boom and demand for Chinese electric vehicles. However, this growth was partly attributed to a surge in frontloading by US retailers ahead of expected tariff hikes, according to shipping executives. The US-China trade relationship, while stabilized by President Donald Trump’s May visit, remains fragile, with Washington proposing a 12.5% tariff on Chinese imports following an investigation into forced labor allegations.

Economists warned that China’s reliance on exports to offset domestic weakness risks long-term instability. “China’s growth model has become increasingly imbalanced,” said Eswar Prasad, a Cornell University professor. The focus on high-tech manufacturing and AI has drawn criticism for neglecting lower-value industries and job-creating sectors. Fixed-asset investment in 2026 fell 5.7%, while retail sales grew just 1.3% in the first half of the year. “The foundation for the economy to improve still needs to be consolidated,” the NBS said.

Despite the slowdown, China’s first-half growth of 4.7% kept it on track to meet its 2026 target. The International Monetary Fund recently raised its forecast for China’s annual growth to 4.6%, though it projects a decline to 4.1% in 2027. Analysts like Zhang Zhiwei of Pinpoint Asset Management argued that the government is unlikely to shift policy in the short term, citing the first-quarter growth of 5% and the resilience of exports. However, concerns over domestic demand persist. Yue Su of The Economist Intelligence Unit urged policymakers to prioritize consumption through fiscal stimulus, while others questioned the feasibility of such measures amid fiscal constraints.

The property sector’s collapse has also left local governments under pressure to cut costs, exacerbating economic fragility. Emma Cheng, a nurse in Guangxi, described her income as having “fallen off a cliff” due to underfunded healthcare. “I don’t dare spend on such things now,” she said, citing reduced discretionary spending. Meanwhile, tens of millions of workers have shifted to the gig economy, facing long hours and inadequate benefits.

As China’s leaders prepare for the Politburo’s July meeting, the challenge remains balancing export-driven growth with domestic revitalization. “The government needs to boost domestic demand, but there is no consensus on how to do it,” said Zhang. With global uncertainties, including the Iran war and US-China tensions, the path to sustainable growth appears fraught, even as the economy navigates a “significant transition” toward higher-quality development.