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.”

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........

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