China's economy expanded 4.3% year-on-year in the second quarter, falling short of market expectations and marking a significant milestone as the first time the country has missed its GDP target since the Covid-19 pandemic. According to the National Bureau of Statistics (NBS), this slower growth rate represents the lowest quarterly expansion since the end of 2022, the period when China emerged from its strict Covid-19 restrictions. The disappointing economic data represents a rare admission of economic weakness for China, which has long worked to prop up industrial activity with infrastructure investment and exports. The figures fell short of expectations for 4.5% growth, with China's target for 4.5-5% expansion this year being the lowest since Beijing started announcing such figures in the early 1990s. As noted by Natixis chief economist Alicia Garcia-Herrero, "No domestic demand, all about exports – it's really quite unsustainable."
Despite the overall economic growth concerns, several economic indicators showed encouraging signs. As reported by Reuters, retail sales grew 1% in June, rebounding from a 0.6% drop in the prior month and exceeding economists' forecast for a 0.1% fall. Additionally, industrial output expanded 5.3% in June from a year ago, stronger than the forecast 4.7% growth, and gaining pace from 4.5% expansion in May. The urban unemployment rate remained steady at 5% in June, with the leadership targeting an unemployment rate of less than 5.5% over the next five-year period. However, urban fixed-asset investment declined 5.7% in the first six months from a year earlier, worse than expectations for a 4.9% drop, representing what analysts describe as the worst possible data for investment. According to Economist Intelligence Unit senior economist Tianchen Xu, "Boosting infrastructure investment will be a key focus for stabilizing growth."
The weaker economic data is a sign that sluggish consumption at home is outweighing recent strength in Chinese exports, and the nation is not immune from the economic turmoil caused by the war in Iran. As reported by Reuters, higher energy costs during the war in Iran have helped lift China out of one of its longest periods of deflation, as global crude prices settled as high as $114 a barrel in May as strikes in the Middle East and the effective closure of the Strait of Hormuz choked off supplies from the Gulf. However, the continuation of attacks between the US and Iran could pose challenges to China's economy, with more expensive fuel and commodities potentially weighing on consumer sentiment and disrupting manufacturing. The International Monetary Fund warned in its July report that "the possibility of renewed Middle East conflict looms large and could extend commodity price volatility, further threaten supply chains, raise prices, and weigh on financial conditions."
Technology stocks led the market decline, with several major companies experiencing significant losses. According to reports from Reuters, shares of Cambricon Technologies, Hygon Information Technology, NAURA Technology, Eoptolink Technology, and Zhongji Innolight were among the biggest losers in the technology sector. The weakness in technology stocks contributed to the broader market decline despite some positive economic indicators, as the divergence underscores an increasingly pronounced 'two-track economy' in China – advanced technologies are powering its thriving export engine, while demand for everyday goods stagnates at home. As noted by Macquarie research, chips, computer parts and power equipment accounted for about half of China's export growth in the first half of the year, with external demand being the bright spot of China's economy so far in 2026. Customs data for June showed that China's tech exports were boosted by soaring global demand for semiconductors to power artificial intelligence (AI) data centres, while surging demand for Chinese electric vehicles (EVs) also gave a major boost to China's exports - with monthly car exports topping one million for the first time in June.
The economic slowdown is being compounded by persistent challenges in China's property market, with property investment falling 18% in the first half of the year, compared with a fall of 16.2% in the first five months, according to the NBS. According to Business Standard, new home prices continued to decline in June, although the pace of the fall moderated to 0.1% from the previous month. The NBS highlighted that the economy was facing "more external instability and uncertainty factors" and noted a persistent imbalance between strong industrial production and weak domestic demand. The weaker economic data has prompted Beijing to release its first five-year policy plan to boost consumption and lift annual retail sales to about $9 trillion by 2030. According to Peking University economics professor Su Jian, Beijing was unlikely to roll out broad-based, aggressive stimulus measures in the coming months, but could unveil further support measures centred on "new infrastructure" in the second half of the year. NBS deputy head Mao Shengyong noted that the growth pace is in line with the annual target, with the economy remaining on a stable footing and its underlying trend toward innovation-driven and high-quality development unchanged.
