China GDP slows to 4.3% as property slump deepens, exports diverge

China's economy expanded 4.3% in the second quarter from a year earlier, the weakest pace since the Covid era, as a deepening property downturn and sluggish consumer spending offset a boom in AI-driven exports.

"The primary drag on the headline growth figure stems from a deepening downturn in domestic investment activity," said Andy Ji, Asian FX & rates analyst at ITC Markets in Shanghai. "A high-tech-driven industrial engine running alongside cratering domestic consumption firmly highlights the economy's deeply uneven growth momentum."

The reading missed the 4.5% consensus forecast in a Reuters poll and slowed from 5.0% in the first quarter. On a quarterly basis, GDP rose 0.9%, matching expectations but decelerating from 1.3% in January-March. Fixed asset investment fell 5.7% in the first half from a year earlier, worse than the 4.9% decline forecast, while property investment cratered 18%. Retail sales eked out a 1% gain in June, rebounding from a 0.6% drop in May but remaining deeply subdued.

The data highlights the challenge facing Beijing as it tries to sustain growth while correcting a widening supply-demand mismatch. Industrial output rose 5.3% in June, beating the 4.7% estimate, powered by exports of electronics and networking equipment for AI data centers. But that strength has failed to translate into stronger household spending or private investment, leaving the economy increasingly reliant on external demand at a time when global trade faces disruption from the Iran conflict and rising protectionism.

The divergence between manufacturing and consumption has become the defining feature of China's post-pandemic recovery. First-half exports grew 13.4% from a year earlier, while imports surged 22.1%, reflecting both strong overseas demand and stockpiling ahead of potential US tariff increases. The trade boost, however, has not filtered through to the broader economy: the urban unemployment rate averaged 5.2% in the first half, and consumer prices rose just 1% year-on-year, well below the government's 2% target.

The property sector remains the deepest drag. Real estate investment plunged 18% in the first half, accelerating from a 16.2% decline in the January-May period. New home sales by floor area fell 11.6%, and sales value dropped 13.6%, suggesting that recent policy easing has yet to stabilize the market. The last time property investment contracted this sharply was during the 2022 Covid lockdowns, when GDP growth also hovered around 4%.

Stimulus expectations build ahead of Politburo meeting

Policymakers are under growing pressure to deliver fresh support when the Politburo meets in late July. Analysts expect faster issuance of special local government bonds and potential reserve requirement ratio cuts, though aggressive easing remains unlikely given resilient exports and Beijing's focus on curbing excess factory capacity. The People's Bank of China has kept its seven-day reverse repo rate unchanged since May 2025, and the weighted-average RRR has stayed steady, with markets pricing a possible 20-basis-point cut in the fourth quarter.

"Growth has become more uneven — exports continue to support headline activity, but domestic demand has softened notably," Goldman Sachs analysts said in a note ahead of the data. "Moreover, the boost from exports has not translated into a stronger labor market or meaningful profit improvement."

The economy faces additional headwinds from the Iran conflict, which has pushed oil prices higher and raised costs for manufacturers. China has largely absorbed the shock through large stockpiles and state-controlled fuel prices, but a prolonged energy cost increase could squeeze factory margins and reduce Beijing's policy flexibility. For 2026 as a whole, GDP growth is forecast to cool to 4.6% from 5% last year, before easing further to 4.4% in 2027, according to a Reuters poll.

This article is for informational purposes only and does not constitute investment advice.