China’s Economy Slows to 4.3% in Q2 as Property Crisis Hits Investment

The second-quarter growth rate falls below Beijing’s full-year target range of 4.5% to 5%, which is the least ambitious goal set in decades. The slowdown comes amid sluggish domestic demand and tensions with trade partners, including the European Union and the U.S.

Investment Slump and Property Crisis

A deepening slide in investments has strained economic growth, with urban fixed-asset investment—which includes infrastructure and real estate development—declining 5.7% in the first six months of the year. This exceeded the 4.9% drop predicted by a Reuters poll.

Official data highlights severe contractions in specific sectors:

• Real Estate: Investment plunged 18%.
• Infrastructure: Investment fell 2.4%.
• Manufacturing: Investment dropped 1.2%.

Tianchen Xu, a senior economist at the Economist Intelligence Unit, attributed the steep investment slump to a shortage of eligible projects and local governments prioritizing debt restructuring. Li Daokui, a professor of economics at Tsinghua University, described the intensity of the investment pullback as “unprecedented” and called for government borrowing to more than double the planned 12 trillion yuan ($1.7 trillion) in new debt issuance.

The AI Boom and Export Resilience

Despite the domestic slump, China’s manufacturing and trade sectors remain strong, powered by a global artificial intelligence investment boom. Exports grew by 27% in June compared to the previous year, driven by demand for power equipment, computers, chips, and parts. In the first half of the year, the value of exports grew by more than 20%.

This strength has resulted in a trade surplus of more than $125 billion in June, the second largest on record.

Yu Song, chief China economist at UBS Securities, stated that without the global AI boom, China’s economy would be in a “much worse state.”

Subdued Consumption and Price Volatility

Domestic consumption remains a significant weakness. Retail sales in May posted their first monthly decline since late 2022 due to tepid demand and steep discounting by merchants. While June saw a slight recovery with 1% growth, consumers remain reluctant to spend.

Household spending has also been pressured by volatile energy prices. The war in Iran led to rising fuel costs, which prompted some consumers to fly and drive less. Despite government efforts to control pump prices, costs remain in the double-digit percentages higher than a year ago.

One positive development was the reversal of a long-term deflationary trend. China’s GDP deflator, which had been negative in 13 of the last 14 quarters, turned positive in the second quarter.

Policy Outlook and Stimulus Debates

The National Statistics Bureau described an “acute” imbalance between excess supply and sluggish demand, urging policymakers to implement “counter- and cross-cyclical adjustments.” Premier Li Qiang recently told entrepreneurs that officials are focusing on job stabilization and new drivers of consumption.

Economists are divided on the likelihood of immediate government intervention:

• Calls for Stimulus: Tianchen Xu expects ramped-up measures in the third quarter, including a policy rate cut.
• Skepticism: Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, suggested that resilient exports and a strong first quarter might prevent a meaningful policy shift.
• Wiggle Room: David Chao, global market strategist at Invesco, noted that better-than-expected industrial output (which expanded 5.3% in June) and retail sales give policymakers more flexibility regarding near-term stimulus.

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