China’s economy grew last quarter at the slowest pace in three years, reflecting a broader decline that the country’s leaders signaled earlier this year when they set the lowest growth target in more than three decades.
On Wednesday, the National Statistics Office said the economy expanded 4.3 percent in the second quarter, compared with a year ago, below the 5 percent pace in the first quarter and below economists’ expectations.
Although China’s factories are churning out chips and electric cars to supply a global boom in artificial intelligence and energy-saving products, many Chinese are feeling the squeeze at home.
A long-running housing crisis has no end in sight, with sharp declines in development activity dragging down economic growth. It is difficult to find jobs outside the factories and salaries are not increasing. Retail sales of consumer goods have been volatile. They fell in May, for the first time since the end of Covid-19 lockdowns at the end of 2022, before recovering somewhat in June.
This is in stark contrast to China’s relentless strength in manufacturing and trade, with a government report released on Tuesday showing China’s exports increased by 27. percent in June compared to a year earlier, driven by shipments of chips, batteries and automobiles. China’s June trade surplus of more than $125 billion was the second largest on record. In the first half of the year, the value of China’s exports grew more than 20 percent, data showed on Wednesday.
For economists, the latest figures are another indication that China’s powerful export machine is masking weaknesses elsewhere.
“There’s this AI boom going on, which is a global thing, and China is one of the leading nations on the frontier,” said Yu Song, chief China economist at UBS Securities. “Without this, China’s economy would be in a much worse state.”
When measured quarterly, China’s economy expanded just 0.9 percent in the second quarter. When projected out one year, the second-quarter data implied the economy was growing at an annual rate of 3.6 percent, well below a pace of more than 6 percent in the first quarter.
The annualized rate for the second quarter also did not meet official targets. Deficiencies in China’s economic growth engines led the ruling Communist Party earlier this year to set the lowest annual growth target in decades, with a target of between 4.5 percent and 5 percent this year.
The effects of the war in Iran have put additional pressure on Chinese households, with rising fuel prices forcing them to drive and fly less, at a time when many were already worried about the economy and opting to save more.
China has softened the blow of rising fuel costs by controlling the price at the pump, but the cost of refueling for drivers remains double-digit percentages higher than a year ago.
One silver lining, economists said, was that rising fuel prices began to feed through to broader inflation in the quarter, reversing a problem China has struggled to overcome: more than three years of widespread falling prices. This deflation tends to cool spending, and consumers postpone purchases with the expectation that prices will be lower in the future.
China’s gross domestic product deflator, a broad measure of prices across the economy, has been negative in 13 of the past 14 quarters — the longest decline on record. But it turned positive in the second quarter.
For Chinese leaders, the question now is: what to do next? Li Qiang, China’s premier, told a group of businesspeople this week that officials were focusing on new drivers of consumption and ensuring employment stabilization.
“It is important to take a comprehensive and objective view of the current economic situation, fully recognizing the achievements made while keeping a clear view of the problems,” Mr. Li said, according to state media, which published a story about the meeting on the front page of the official People’s Daily.
Some economists anticipate a discussion on new stimulus measures at a meeting of top officials later this month. On Monday, China’s top economic planner announced a plan to reach $8.85 trillion in annual retail sales by 2030, a 20 percent increase from last year.
Beijing has also promised to raise wages and increase household consumption as a share of the economy. It is currently around 40 percent, significantly less than the 60 percent of gross domestic product of most developed countries.
But analysts said these goals are not particularly ambitious. And stubbornly reluctant Chinese consumers show few signs of wanting to open their wallets.
Online shoppers share tips on how to scrimp and save, uniting around the motto “save where you can, spend where you must.”
Users have shared tips about “shopping cart cooling-off periods,” or leaving non-essential items in carts for three days before deciding to purchase them. (The practice is a tongue-in-cheek nod to the officially enforced “cooling off period” for couples seeking a divorce.)
Others are pushing to replace foreign cosmetics brands with cheaper local alternatives and to replace skin care products with baby lotions. “Buy the right thing, not the expensive thing,” a Weibo social media user recently posted.
Meanwhile, prices have continued to fall for products as varied as cosmetics and automobiles. For categories such as automobiles, the recent decline has been accentuated by the end of a policy to encourage purchases.
Since a devastating housing crisis, Chinese authorities have sought to replace the growth generated by the real estate sector with more robust consumer spending. They implemented huge subsidies for households to trade in old cars, appliances and phones from 2024 until last year.
While it generated some activity, the policy failed to address falling property values, where most household wealth is concentrated. Now, economists say, China is in a “recovery period” following the policy-induced jump in sales.
As the economy divides between the relatively few who benefit from China’s role in the global AI boom and the rest, the division is having a profound impact on the country’s social fabric.
It has accentuated the class divide between “those who benefit from the rise of their talents, well-protected jobs and wealth versus those who are wholly or partially replaced by AI,” according to economists at Nomura, a Japanese bank.
China’s housing crisis has caused more than 14 million people to lose their construction jobs. Many of those workers bought apartments in smaller cities, far from pockets of AI-generated wealth that can revive parts of the housing market.
“For China, the problem is that it wants to make sure it is still on the border,” said Song, the UBS economist. “What you want is for the benefits to be shared more widely so as not to leave too many people out.”
The rise of AI “does not benefit ordinary people in China because this priority, the industrial focus on high technology and semiconductors, actually causes structural unemployment and underemployment,” said Dan Wang, China director at Eurasia Group, a consulting firm.
What’s more, Ms. Wang said, disposable income growth is now lower than economic growth. If this continues, he noted, “that means the distribution of national income is skewed toward the government and businesses, and not toward consumers.”
