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AIPROPX ReportFortune · 2h ago
Inside China’s two-speed economy: Why goods consumption is slumping even as exports and services boom
China’s economy grew just 4.3% in the second quarter, the slowest pace since the end of the pandemic and short of Beijing’s own target. Look under the hood, however, and the issue looks more like a consumption problem: retail sales rose a mere 1.0% in June, even as exports jumped 27% in dollar terms and industrial output grew 5.3% .
The world’s second-largest economy looks like it’s running at two speeds: An export-focused manufacturing sector that’s feeding global hunger for electronics and semiconductors, and a weaker domestic economy beset by sluggish sales, a property sector bust, and “involution,” China’s term for fierce, margin-suppressing competition.
“There’s remarkable resilience and bright spots in manufacturing and exports, and softness in consumption and fixed asset investment,” said Carol Liao, Greater China chair for Boston Consulting Group. “That’s been the pattern for a while now, since 2025.”
No ‘free handouts’
The pandemic marks a clean before-and-after in Chinese consumer behavior. Before COVID, consumption growth consistently outpaced GDP growth; since the pandemic, the reverse has held true, Liao said.
The most obvious culprit is the property market: falling home values have eroded household net worth for a population that holds the bulk of its wealth in real estate, discouraging spending. “This is about the willingness to spend, not ability,” William Bratton, head of cash equity research, APAC at BNP Paribas wrote in a July 22 note.
Chinese officials remain allergic to direct cash transfers, with President Xi Jinping warning against both “welfarism” and “feeding lazy people.”
“China normally doesn’t give free handouts,” Liao said. Instead, Beijing prefers to “invest in people,” channeling money into human capital—like early-education subsidies, elderly care, and social safety-net spending—rather than checks to households.
On July 13, China unveiled its first-ever standalone five-year plan for consumption, part of the broader 15th Five-Year Plan. “By 2030, the overall scale of the consumer market will continue to expand, the household consumption rate will rise markedly…and consumption’s role in driving economic growth will be further strengthened,” China’s State Council said.
The plan targets 60 trillion yuan, or almost $9 trillion, in annual retail sales by 2030. Yet Beijing’s ambitions are still modest: Hitting that target will need annual consumption growth of 3.7% over the next five years, well below the 5.0% pace recorded in the first half of the decade.
“It’s small steps, but it’s moving in the right direction,” Liao said. “Policymakers are very good at the supply side of things; they’re not so good at the demand side.”
Cars are the biggest drag—but not the whole story
There’s even a two-speed economy within China’s consumption numbers. Goods consumption is weak, while services consumption is outperforming, running above headline GDP growth, Liao said.
Cars have been a huge drag on China’s consumption numbers. Chinese automakers sold 1.6 million cars last month, a 23.2% drop from the same period a year earlier. The Chinese Passenger Car Association now predicts that total car sales will drop by 14% this year, to 20.4 million. (Here, too, exports are proving to be a bright spot: The country exported 1.1 million cars last year, a 70% year-over-year jump).
Two forces are compounding the slump, Liao said. The consumption subsidies that once nudged buyers toward electric vehicles and plug-in hybrids are “fading off a bit” after roughly two years in place. At the same time, “cut-throat competition” among domestic automakers has crushed margins across the industry and, perversely, discouraged some buyers from purchasing at all, as they wait for prices to fall further.
Yet the pullback isn’t universal. Basic necessities—dairy, rice, staples where supply is abundant and quality reliable—have become a hunt for the best price. “For things like dairy products and rice—basic daily necessities where supply is ample and the quality is pretty good—shoppers are looking for a bargain,” Liao said.
Discretionary “lifestyle” spending, by contrast, is holding up: Pop Mart’s Labubu dolls , pet care, and outdoor recreation are all categories where Chinese consumers are still willing to pay up. “This stuff adds color to people’s lives,” she said.
(Data collected by Zhaopin, a jobs platform, in March reported that “pet services” had the second-highest growth in hiring, after “robotics.”)
“Looking ahead, we expect funding support should continue to shift towards services consumption, which still offers significant untapped potential in China,” HSBC China economists Erin Xin and Taylor Wang wrote in a July 15 note.
What China exports has changed
Liao expects to see “stabilization or growth” in China’s economy in the second half of the year, thanks primarily to exports.
The export boom looks different than in previous cycles, she argued. “It’s not the traditional, low-value-added stuff,” she says. “It’s advanced manufacturing, related to the AI investment boom.”
China doesn’t produce the most advanced chips used in AI processors from companies like Nvidia , but it dominates production of older-generation chips that go into phones, PCs, game consoles, and other consumer electronics; these are now in short supply as data-center construction consumes capacity that would otherwise serve consumer electronics makers.
The country’s chip manufacturers reported a staggering 2579% jump in profit for the first half of the year, according to data from the National Bureau of Statistics released on July 27.
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