China's economy expanded at its slowest pace in more than three years in the second quarter of 2026, missing market forecasts and intensifying concerns over the long-term sustainability of the country's unbalanced growth model, according to data reported by Reuters on July 15. Gross domestic product grew 4.3% year-on-year in the April-June period, down sharply from the 5.0% recorded in the first quarter and falling below the lower end of Beijing's official full-year target range of 4.5% to 5.0%. For the first half of 2026 as a whole, the economy expanded 4.7%, keeping it within the annual target band but reducing the urgency for sweeping stimulus measures.
The data exposed a stark divergence between a resilient manufacturing and export sector and persistently weak domestic demand. Retail sales rose just 1.0% in June, while industrial output expanded 5.3% — a combination that analysts say reflects an overwhelming reliance on global demand for manufactured goods at a time when trading partners are voicing growing complaints about China's trade imbalances. In response to the figures, Morgan Stanley cut its full-year GDP growth forecast for China to 4.6% from 4.8%.
Investment data painted an equally troubling picture. China's fixed-asset investment contracted 5.7% year-on-year in the January-to-June period, with even state-sector investment declining 2.3%. Property investment fell 18% year-on-year in the same period, extending the prolonged downturn in real estate that has eroded household wealth and suppressed employment in construction since 2021.
New bank loans in June also rose less than expected. Andy Ji, an analyst at ITC Markets, described investment weakness as "the primary drag" on growth. "A high-tech-driven industrial engine running alongside cratering domestic consumption and investment firmly highlights the economy's deeply uneven growth momentum," Ji said.
The structural strains are being felt acutely at the household level. Wages have been sluggish or declining in some sectors, industrial overcapacity and U.S. tariffs have fuelled factory layoffs, and the rapid adoption of artificial intelligence has slowed white-collar job creation. Tens of millions of workers have moved into the gig economy, taking up ride-hailing and delivery roles characterized by long hours, low pay and inadequate social security coverage.
Jane Hou, who operates a European goods importing business in eastern China, told Reuters her income has roughly halved since the start of the year, and an apartment she rents out has been vacant for more than six months. "Apart from necessary spending on food, I save on anything I can," she said. "I haven't bought a single piece of clothing in six months." Emma Cheng, a 28-year-old nurse in Guilin, described her income as having "fallen off a cliff" due to underfunding in the local medical sector.
"In the past I would get gym memberships, beauty salon cards, Tencent Video subscriptions and replace my phone or iPad," she said. "I don't dare spend on such things now." Local governments, long a key driver of manufacturing and infrastructure investment, are also cutting costs including payroll, removing another pillar of domestic demand. On the external side, trade data released Tuesday showed exports surging 27% in June, beating forecasts and driven in part by the global artificial intelligence boom and frontloading by U.S. retailers seeking to build inventories ahead of anticipated tariff increases later in the year.
However, the trade outlook remains fraught with uncertainty. A universal 10% U.S. tariff imposed in February — after the Supreme Court declared certain earlier tariffs illegal — is set to expire on July 24 and is widely expected to be replaced with higher levies. The U.S.
Trade Representative has proposed a 12.5% tariff on imports from China following an investigation into forced labour, which Beijing denies, with a final decision expected in coming months. The European Union, whose trade deficit with China averaged $1 billion a day last year, is also moving to strengthen protections for its industrial sector against Chinese competition. U.S.
President Donald Trump's visit to China in May preserved a degree of diplomatic detente between the world's two largest economies, but the relationship remains fragile. Additionally, renewed conflict between the United States and Iran is adding uncertainty to the global growth outlook. With the data now in focus, attention is turning to the Communist Party's Politburo meeting expected at the end of July.
Many analysts caution that Beijing is unlikely to announce major stimulus steps at that gathering, given concerns over ballooning public debt. Zhiwei Zhang, chief economist at Pinpoint Asset Management, doubts the Politburo will signal a wider fiscal deficit given the current resilience of exports. "The government seems reluctant to spend fiscal resources and build up debt," Zhang said.
"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 acknowledged that monetary conditions were "relatively loose" at present but pledged continued support for domestic demand. Larry Hu, chief China economist at Macquarie Group, argued that Beijing has little incentive to pivot away from its reliance on 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." Economists broadly agree that the core challenge facing China is not the pace of growth but its composition — a structural imbalance that the second-quarter data has brought into sharp relief. Source: Reuters, reporting by Liangping Gao, Ellen Zhang, Kevin Yao in Beijing and Claire Fu in Singapore.
Source: reuters.com