China's Q2 GDP growth cools to 3-1/2-year low, structural imbalances complicate policy

China's second-quarter economic growth weakened to its lowest level in more than three years, missing expectations and the government's 2026 target as a persistent mismatch between strong supply and weak demand underscored deep structural imbalances.

Gross domestic product in the world's second-biggest economy rose 4.3% in the second quarter from a year earlier, official data showed on Wednesday, below analysts' forecast in a poll for 4.5% growth and cooling from a 5.0% gain ‌in the first quarter.

The ⁠reading marked ⁠China's slowest annual growth rate since the fourth quarter of 2022, when strict COVID-era restrictions were weighing on activity. It also fell below the lower end of the government's full-year growth target range of 4.5% to 5%, highlighting the increasing challenge policymakers face in reviving demand and sustaining momentum.


China's economy is becoming increasingly unbalanced: factory output remains robust, helped by AI-related exports, while consumption and investment struggle under the weight of a prolonged property slump and fallout from the global oil shock.

"The policy debate now shifts toward how Beijing intends to secure its annual growth target. We expect policymakers to maintain a strong focus on supporting domestic demand, particularly consumption and infrastructure investment," said Hao Zhou, a Hong Kong-based analyst at Guotai Haitong Securities.

However, Zhou ruled out broad-based stimulus. "As long as external demand continues to provide a meaningful cushion to growth, authorities are likely to prefer targeted and incremental ⁠policy support rather ‌than deploying large-scale stimulus measures."

Investors are closely watching an expected late-July Politburo meeting for clues on fresh stimulus that could shape policy for the rest of the year.

On a quarterly basis, GDP grew 0.9% in the second quarter, in line with analysts' forecast and compared with the 1.3% gain in ⁠the previous quarter. For the first half of the year, the economy grew 4.7%.

JUNE WITNESSES SOLID PRODUCTION, WEAK INVESTMENT

Separate activity data for June pointed to robust industrial output and an improvement in household consumption, but weak investment dragged on the broader economy.

Industrial output rose 5.3% last month from a year earlier, accelerating from 4.5% growth in May and marking the quickest pace in three months. Retail sales grew 1.0% in June, reversing a 0.6% fall in May for their fastest growth in three months. Analysts had forecast a 0.1% dip.

Sales of communication appliances, cultural and office supplies, tobacco, alcohol and cosmetics helped drive the recovery.

During January-June, services sales expanded 5.3%, much faster than the 1.1% gain in goods sales.

Fixed-asset investment shrank 5.7% in the first six months of 2026, compared with expectations for a 4.9% decline. It fell 4.1% in the January-May period. In the same period, private investment contracted 8.5%, and even state-sector investment fell ‌2.3%.

As fiscal spending lagged, infrastructure investment shrank 2.4%.

"A high-tech-driven industrial engine running alongside cratering domestic consumption and investment firmly highlights the economy's deeply uneven growth momentum," said Andi Ji, an analyst at ITC Markets.

The property industry remained in the doldrums, with investment falling 18% in the first half of the year compared with the same period last year, widening from the ⁠16.2% drop in January-to-May.

New home prices contracted again in June, though at a slightly slower pace, as weakness in nationwide demand offset small pockets of improvement in core cities.

FISCAL LEVERS EXPECTED TO DRIVE STIMULUS

Premier Li Qiang called on Monday for "a comprehensive and objective understanding" of the current economic situation and for a stronger counter-cyclical adjustment, state broadcaster CCTV reported.

Analysts expect Beijing to rely more heavily on fiscal stimulus to cushion any further slowdown, with the central bank constrained in its ability to deliver aggressive monetary easing even after the decline in oil prices.

China on Monday revealed its first five-year plan focusing on consumption and aims for annual retail sales of around 60 trillion yuan by 2030.

"The recent policy focus on boosting consumption suggests Beijing is increasingly aware of this imbalance, but meaningful rebalancing will require more than trade-in subsidies and consumer incentives," said Minxiong Liao, senior economist at GlobalData.TS Lombard APAC.

"Unless stronger fiscal support reaches households through higher social transfers and a more robust healthcare and pension system, precautionary saving is likely to remain elevated and any improvement in consumption will probably prove gradual rather than self-sustaining."