China’s Q2 Growth Slows to 4.3%, Weakest Since 2022 as Exports Mask Domestic Weakness

Exports surge, but weak domestic demand drags on growth

Manufacturing booms while consumption and investment falter

China’s economy posted its weakest quarterly growth in more than three years in the second quarter, as a boom in manufacturing and exports tied to artificial intelligence failed to offset soft domestic demand and investment.

A prolonged property slump continues to weigh on household sentiment, adding to calls for policymakers to bring forward public spending.

Second-quarter growth weakest since Covid shock

China’s gross domestic product rose 4.3% in the April-June quarter from a year earlier, the National Bureau of Statistics said on July 15. That was slower than the 5% growth recorded in the first quarter. It also missed the lower end of the government’s full-year growth target range of 4.5% to 5%, as well as economists’ 4.5% forecast. The second-quarter reading was the weakest since the fourth quarter of 2022, when growth slowed to 2.9% as the pandemic hit the economy.

Economists say the bigger concern is the quality of growth rather than the pace alone, with the economy relying too heavily on overseas demand for manufactured goods. Exports rose 27% in June from a year earlier in dollar terms, according to the General Administration of Customs, accelerating from 19.4% in May. Demand for electronics and information-technology products, including computing servers and data-center equipment, drove the increase.

Goldman Sachs said exports are still supporting overall economic activity, but domestic demand is weakening visibly. Export growth has not done enough to strengthen the labor market or improve corporate profitability, limiting the broader spillover to the economy.

With pushback from trading partners including Europe and the war in the Middle East adding strain to the global economy, concern is mounting over China’s unbalanced growth pattern of strong exports and weak domestic demand.

That split is clear in the latest data. Industrial production rose 5.3% in June from a year earlier, while retail sales increased just 1%. Fixed-asset investment fell 5.7% in the first half from a year earlier. Real-estate development investment dropped 18% over the same period, the steepest decline since comparable records began in 1992.

China’s property slump has eroded household wealth and weakened construction employment for years. As a result, even local governments, long key drivers of manufacturing and infrastructure investment, are under pressure to cut costs.

Bloomberg News said the downturn in domestic investment activity deepened in the second quarter, increasing the drag on growth. High technology is emerging as an engine for industrial expansion, but China’s growth drivers appear extremely unbalanced against weak domestic consumption and investment.

China’s export-led economy shows stark imbalances

The GDP deflator, a broad measure of price changes across the economy calculated by dividing nominal GDP by real GDP, turned positive for the first time since early 2023. Even so, many analysts said the shift reflected higher prices for imported goods such as crude oil, rather than a fundamental easing of deflationary pressure caused by excess supply.

Markets are watching for a meeting of the Chinese Communist Party’s Politburo that is likely to be held later in July. China’s top leadership typically uses the meeting to review economic conditions and adjust policy to keep growth on track.

Investors expect authorities to bring forward fiscal spending and expand infrastructure investment after the sharper slowdown in the second quarter. Still, a large-scale stimulus package may be difficult to deliver. China’s economy grew 4.7% in the first half, keeping it within the government’s target range.

Zhang Zhiwei, chief economist at Pinpoint Asset Management, said the Politburo meeting is unlikely to signal a wider fiscal deficit for now because exports remain strong. He added that the Chinese government appears reluctant to commit more fiscal resources and take on more debt. While policymakers and researchers broadly agree that domestic demand needs to expand, there is no consensus on how to achieve that.

Kim Eun-jung, Beijing correspondent, Korea Economic Daily kej@hankyung.com